SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                            ---------------------

                                  FORM 10-K

(Mark one)

      X       ANNUAL  REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES
              EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2001

                                       OR

              TRANSITION   REPORT  PURSUANT  TO  SECTION  13  OR  15(D)  OF  THE
              SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
              FROM       TO
                  -------  ------

                           Commission File No. 1-13851
                                ----------------

                                   SONUS CORP.
             (Exact name of registrant as specified in its charter)

           YUKON TERRITORY, CANADA                  NOT APPLICABLE
    (State or other jurisdiction of      (I.R.S. employer identification no.)
     incorporation or organization)

      111 S.W. Fifth Avenue, Suite 1620                 97204
            Portland, Oregon                          (Zip code)
(Address of principal executive offices)

Registrant's telephone number, including area code  (503) 225-9152

      Securities registered pursuant to Section 12(b) of the Exchange Act:

  Title of Each Class                  Name of Each Exchange on Which Registered
  -------------------                  -----------------------------------------
 Common Shares, Without Nominal or Par Value     American Stock Exchange

    Securities registered pursuant to Section 12(g) of the Exchange Act: NONE
                        --------------------------------

      Indicate by check mark whether the  registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

      State the  aggregate  market  value of the  voting and  non-voting  common
equity held by non-affiliates  of the registrant.  The aggregate market value is
computed by reference to the price at which the common  equity was sold,  or the
average bid and asked  prices of such common  equity,  as of November  30, 2001:
$3,334,366.

      Indicate  the  number of shares  outstanding  of each of the  registrant's
classes of common stock: Common Shares,  without nominal or par value, 6,150,164
shares as of November 30, 2001.


                      DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant's definitive Management Information Circular
and Proxy Statement dated November 30, 2001, are incorporated by reference into
Part III of this Form 10-K.



<PAGE>


                              TABLE OF CONTENTS

                                                                        PAGE
PART I    ............................................................    3
ITEM 1.   Business....................................................    3
ITEM 2.   Properties..................................................   11
ITEM 3.   Legal Proceedings...........................................   11
ITEM 4.   Submission of Matters to a Vote of Security Holders.........   12
PART II   ............................................................   12
ITEM 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.......................................   12
ITEM 6.   Selected Financial Data.....................................   15
ITEM 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................   16
ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk..   23
ITEM 8.   Financial Statements and Supplementary Data.................   24
ITEM 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................   52
PART III  ............................................................   52
ITEM 10.   Directors and Executive Officers of the Registrant.........   52
ITEM 11.  Executive Compensation......................................   52
ITEM 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................   52
ITEM 13.  Certain Relationships and Related Transactions..............   52
PART IV   ............................................................   53
ITEM 14.  Exhibits, Financial Statement Schedules, and Reports on
            Form 8-K..................................................   53



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                          FORWARD-LOOKING STATEMENTS

      Statements in this report,  to the extent they are not based on historical
events,  constitute  forward-looking   statements.   Forward-looking  statements
include,  without  limitation,   statements  containing  the  words  "believes,"
"anticipates,"  "intends," "expects," and words of similar import. Investors are
cautioned  that  forward-looking  statements  involve  known and unknown  risks,
uncertainties and other factors that may cause the actual results,  performance,
or achievements  of Sonus Corp. (the "Company") to be materially  different from
those described herein. Factors that may result in such variance, in addition to
those accompanying the  forward-looking  statements,  include economic trends in
the Company's  market areas, the ability of the Company to manage its growth and
integrate new acquisitions into its network of hearing care centers, development
of new or  improved  medical  or  surgical  treatments  for  hearing  loss or of
technological  advances in hearing  instruments,  changes in the  application or
interpretation of applicable government laws and regulations, the ability of the
Company to complete  additional  acquisitions  of hearing  care centers on terms
favorable  to the  Company,  the degree of  consolidation  in the  hearing  care
industry,   the  Company's   success  in  attracting  and  retaining   qualified
audiologists  and staff to operate its hearing care centers,  the ability of the
Company to attract  audiology  centers as members of The Sonus Network,  product
and  professional  liability  claims brought against the Company that exceed its
insurance coverage,  the Company's ability to collect its accounts receivable in
a timely manner,  and the  availability  of and costs  associated with potential
sources of working capital.  The Company  disclaims any obligation to update any
such factors or to publicly  announce the result of any  revisions to any of the
forward-looking   statements  contained  herein  to  reflect  future  events  or
developments.

                                     PART I

ITEM 1. BUSINESS.

OVERVIEW

      The Company was  incorporated  under the laws of the  Province of Alberta,
Canada,  in July 1993,  under the name "575035 Alberta Ltd." The Company changed
its name to HealthCare  Capital  Corp.  in October  1994,  when it acquired nine
hearing care centers in British Columbia. The Company did not begin operating in
the United  States until it purchased two hearing care centers near Santa Maria,
California,  in July 1996. By vote of the shareholders,  the Company changed its
name from HealthCare  Capital Corp. to Sonus Corp. in February 1998, and changed
its  jurisdiction of  incorporation  from Alberta,  Canada,  to Yukon Territory,
Canada, in December 1998. The Company, through its subsidiaries Sonus-USA,  Inc.
("Sonus-USA"),   Sonus-Texas,  Inc.  ("Sonus-Texas"),  Sonus  Acquisition  Corp.
("Sonus Acquisition") and Sonus-Canada Ltd. ("Sonus-Canada"), currently owns and
operates  104 hearing  care  centers in the United  States and  Western  Canada.
Centers  owned by the Company are located in the states of Arizona,  California,
Illinois,  Michigan,  Missouri, New Mexico, Oregon, Texas, and Washington and in
the Canadian provinces of British Columbia and Alberta.

      In addition to its  company-owned  hearing centers,  the Company operates,
through  Sonus-USA,  a  network-licensing  program  called  The  Sonus  Network.
Licensees are entitled to use the Sonus name and receive other  benefits such as
practice management advice and training,  group buying discounts,  and marketing
services.  There are  currently  566 Sonus  Network  licensees  operating in 901
locations throughout all 50 states and the District of Columbia.

      The  Company,  through its  subsidiary  Hear PO Corp.  ("Hear  PO"),  also
operates  as an  independent  provider  association  and  hearing  care  benefit
administrator.  Hear PO obtains  contracts to provide  hearing care  benefits to
managed care and corporate health care  organizations  through its approximately
1,400  affiliated  hearing centers and sells Hear PO brand private label hearing
instruments. Hear PO currently has contracts to provide hearing care benefits to
over 100 million covered lives.


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      Each of the hearing  care  centers  owned by the  Company  provides a full
range of  audiological  products and services to hearing  impaired  individuals.
During the fiscal years ended July 31, 2001, 2000, and 1999,  approximately 72%,
85%, and 86%, respectively,  of the Company's revenues were derived from product
sales, including hearing instruments,  batteries,  and accessories;  9%, 8%, and
10%, respectively, were derived from audiological services; and 19%, 7%, and 4%,
respectively,   were  from  other   sources,   including   The  Sonus   Network.
Substantially  all of the  Company's  hearing  care  centers  are  staffed  with
audiologists.  The Company's  operating  strategy is to provide  customers  with
high-quality and  cost-effective  hearing care while at the same time increasing
its  operating  margins  by  attracting  and  retaining  customers,   recruiting
qualified  and  productive   audiologists  and  hearing  instrument  dispensers,
achieving economies of scale and administrative efficiencies, and pursuing large
group  and  managed  care  contracts.  The  Company  believes  that  it is  well
positioned to provide retail hearing rehabilitative  services to consumers while
simultaneously  serving the diagnostic needs of referring physicians and meeting
the access and cost concerns of managed care providers and insurance companies.

      The Company sells  products  through its internet  site at  www.sonus.com.
Products that can be purchased through  www.sonus.com include hearing instrument
batteries,  assistive listening devices,  hearing protection items,  educational
materials, and audiology equipment,  supplies and accessories.  Audiologists and
hearing instrument  dispensers can also purchase hearing  instruments for resale
to their customers.

INDUSTRY BACKGROUND

Professionals  and  Centers.  Hearing  instruments  may be dispensed by either a
dispensing audiologist or a hearing instrument specialist ("HIS"). Although both
audiologists  and  HISs  may  be  licensed  to  dispense  hearing   instruments,
audiologists  have  advanced  training in audiology and hold either a masters or
Ph.D. degree.

      The June  2001  issue of The  Hearing  Review,  a hearing  industry  trade
journal,  indicates that  approximately  19% of HISs in the U.S. are at least 61
years of age,  41% are 51-60  years of age,  28% are 41-50 years of age and only
12% are age 40 or under,  compared to 6%, 30%,  42% and 22%,  respectively,  for
dispensing  audiologists.  The  Company  believes  that  many  HISs  are  facing
retirement  with  no  formal   "exit-strategy,"  a  situation  that  creates  an
attractive investment opportunity for the Company.

      The typical  hearing care  practice  wields little  purchasing  power with
manufacturers, and must spread overhead over a relatively small revenue base. In
addition,  a typical  hearing care practice  often has  insufficient  capital to
purchase new  technologies  and lacks the systems and size  necessary to develop
economies  of  scale.  As  a  result,   the  Company  believes  that  dispensing
audiologists  and  HISs  will  find it  increasingly  attractive  to sell  their
practices to or affiliate with larger organizations, such as the Company.

      Managed care arrangements may also favor the consolidation of hearing care
practices.  Managed care organizations  contract with health care providers such
as the Company to provide  health care  services and products to their  members.
These organizations seek to establish relationships with providers whose offices
are  convenient  for the  organization's  members  and  that can  offer  quality
services and products at very  competitive  prices.  Managed care  organizations
also typically seek to shift some of the economic risk of providing  health care
to the provider of the care.  This shifting of risk is  accomplished in a number
of ways,  including capping fees, requiring discounted fees, or paying a set fee
per customer  irrespective of the amount of care delivered to that customer.  As
managed care  arrangements  become more  pervasive,  the Company  believes  that
hearing care  professionals  will have an even  greater need for the  geographic
reach, economies of scale,  information resources, and management expertise that
larger organizations such as the Company can provide.  However,  managed care is
not  presently a large part of the hearing care market and hearing care products
and  services are likely to continue to be provided  predominantly  on a private
pay basis for the next several years.

Hearing Impaired Population. The number of persons in the United States who have
hearing loss is estimated to be  approximately  28 million and the percentage of
individuals  with  a  hearing  loss  relative  to  the  general   population  is
approximately 5% for those under 18 years of age, 5% for those between 18 and 44
years of age, 14% for those



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between  45 and 64 years of age,  23% for those  between 65 and 74 years of age,
and 31% for those 75 years of age and over. In addition,  the American  Tinnitus
Association  estimates  that over 50 million  Americans  experience  tinnitus (a
ringing  sensation  in the  ears) to some  degree.  Of these,  approximately  12
million have tinnitus that is severe enough to seek medical attention.

      The Company believes that the widely  recognized  demographic trend toward
an aging  population will increase the demand for hearing  instrument  sales and
audiological  services and that the demand for hearing instruments that are less
visible  and for newer  and  superior  hearing  instrument  technology,  such as
digital and  programmable  hearing  instruments,  will also contribute to market
growth.  In addition,  the Company believes that some individuals  forgo hearing
care  because  of the  stigma of aging  that can be  associated  with  wearing a
hearing  instrument and that the demand for hearing instrument sales and hearing
care  services can be increased by marketing  and  education  designed to reduce
that stigma.

Hearing Health Care Industry Segments.  The hearing health care industry serving
customers  with hearing and balance  disorders  is  comprised  of four  distinct
service segments:

o      hearing   rehabilitation   services,   including   the   evaluation   and
       rehabilitation   of  persons  with  hearing   impairments   by  assessing
       communicative impairment and providing amplification;

o      advanced  audio-diagnostic   services,   including  the  neuro-audiologic
       evaluation and non-medical diagnosis of hearing and balance disorders;

o      industrial and preventative audiological services,  including noise level
       measurements, dosimetry, and hearing screenings; and

o      otolaryngologic services, including surgery and other medical treatment.

      The Company's  hearing centers  primarily  provide hearing  rehabilitation
services,  which  include the  assessment  and  rehabilitation  of persons  with
hearing  impairments  through  the use of hearing  instruments  and  counseling.
Rehabilitation  services,  including  amplification  systems,  are  provided  by
audiologists and HISs. The services offered include the diagnostic  audiological
testing, fitting and dispensing of hearing instruments, follow-up rehabilitative
assistance,  the  sale  of  hearing  instrument  batteries,  hearing  instrument
repairs,  and the sale of swim plugs,  custom ear plugs, and assistive listening
devices.

      Advanced  audio-diagnostic services include the assessment and non-medical
treatment of vestibular  and balance  disorders and the  evaluation of customers
with specific symptoms of an auditory or vestibular disorder,  including hearing
loss, tinnitus,  and balance problems. In order to make a differential diagnosis
of hearing  disorders,  an ear,  nose and throat  physician  may employ or refer
customers to an  audiologist  to conduct  special  diagnostic  hearing  tests to
differentiate between conductive, sensory, and neural pathology. If the cause of
the hearing loss is a medical  disorder in either the nervous system (neural) or
the middle ear  (conductive),  the physician  proceeds  with medical  treatment.
However,  if a non-treatable  conductive or sensory loss is found, the physician
will generally refer the customer to an audiologist for rehabilitation.

GROWTH STRATEGY

      The  Company's  growth  strategy  involves  expanding  its  operations  by
selectively  acquiring  hearing  centers  located  in  existing  as  well as new
geographic  markets,  increasing  the number of  licensees  under the  Company's
network licensing program,  and increasing the number of covered lives served by
the Company under managed care  contracts  and the  utilization  of hearing care
benefits  provided  under  these  contracts.   The  Company  believes  that  the
fragmented  nature of the hearing care  industry,  the absence of  industry-wide
standards,  and the inexperience  and limited capital  resources of many hearing
care providers  combine to provide an opportunity to build an expanding


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network of Company-owned  and licensed hearing care centers devoted to providing
high-quality hearing health care services.

Acquisitions.  The Company works to expand its network of Company-owned  centers
in each new market by initially  targeting for acquisition a significant hearing
care  practice  in order  to  secure a solid  foundation  upon  which to build a
regional  network of hearing care  practices.  The Company then seeks to acquire
additional  individual or group practices in order to realize economies of scale
in management,  marketing,  and  administration.  As a result of the contacts of
management  with  hearing  care  practice  owners,  the  Company  is  frequently
presented with  opportunities  to acquire  hearing care centers.  From August 1,
1996, to September 30, 2001,  the Company  acquired 131 centers,  all located in
the United States.

      The Company looks at the following  factors before acquiring  centers in a
particular  geographic  market:  (a)  population  size  and  distribution;   (b)
audiology  practice  density,  saturation,  and average  group  size;  (c) local
competitors;  (d) level of managed care penetration;  and (e) the local industry
and economy.  In acquiring  particular  centers within a geographic  market, the
Company  seeks centers with the following  characteristics:  (a) an  established
customer  base  drawing  from  a  substantial   metropolitan   population;   (b)
significant revenue and profitability prior to acquisition; and (c) potential to
enhance center profitability after acquisition.

      Prior to  acquiring a hearing  care  center,  the  Company  conducts a due
diligence  investigation of the center's  operations that includes an analytical
review of the center's financial  statements,  tax returns,  and other operating
data, a review of customer files on a sample basis, a review of credit  reports,
contracts,  bank deposits,  and other documents and information that the Company
deems significant,  and the preparation of financial  projections.  Based on the
information  collected and analyzed during the due diligence review, the Company
determines an appropriate purchase price for the acquisition.

      The Company generally uses cash, promissory notes,  assumption of debt, or
a combination  of the foregoing to fund  acquisitions.  In May 2001, the Company
obtained a $20 million  line of credit  from an  affiliate  of GN ReSound  North
America  Corporation,  one of the Company's major hearing instrument  suppliers,
for the purpose of  acquiring  additional  hearing care  practices.  At July 31,
2001, $5 million was outstanding  under the line of credit.  The amount paid for
each practice varies on a case-by-case  basis according to historical  revenues,
projected   earnings  after  integration  into  the  Company,   and  transaction
structure.   In  connection  with  each   acquisition,   the  Company   acquires
substantially  all of the assets of the  practice,  including  its  audiological
equipment and supplies,  office lease and  improvements,  and customer files. At
the time a  practice  is  acquired,  the  audiologists  and  hearing  instrument
dispensers  associated  with the  practice  typically  become  employees  of the
Company.

      There can be no  assurance  that the  Company  will be able to continue to
complete  acquisitions  consistent  with its expansion  plans,  that such future
acquisitions will be on terms favorable to the Company, or that the Company will
be able to successfully integrate the hearing care centers that it acquires into
its business.  Successful  integration is dependent upon  maintaining  payor and
customer  relationships and converting the management information systems of the
centers the Company acquires to the Company's systems. Significant expansion has
placed excessive strain on the Company's  managerial and other resources and has
necessitated the hiring of additional  managerial and administrative  personnel.
The Company has  currently  curtailed  significant  expansion  of  Company-owned
hearing  centers.  Unforeseen  problems with future  acquisitions  or failure to
manage expansion effectively may have a material adverse effect on the business,
financial condition, and results of operations of the Company.


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The  Sonus  Network.  The  Sonus  Network  was  established  in  August  1998 to
complement  the Company's  internal  growth and  acquisition  strategy and allow
additional  national  growth  without  incurring  the  added  capital  costs and
management  resources necessary for Company-owned  centers.  There are currently
566 members of The Sonus Network representing 901 locations in all 50 states and
the District of Columbia.  The Company allows its licensees maximum  flexibility
in the day-to-day  operation of their businesses,  including the extent to which
they wish to adopt the Sonus name and trademarks.  The Company believes that the
primary  benefits  of joining The Sonus  Network are reduced  pricing on hearing
instruments  and related  products,  access to quality  marketing  materials and
national  advertising  programs  developed by Sonus,  the ability to offer Sonus
private-label  products,  and exclusive  protected  territories  for  licensees.
Additional benefits include  recruiting,  training,  and operational  consulting
services, and ordering of hearing instruments and related products.

OPERATING STRATEGY

      The  Company's  operating  strategy  is  to  provide  its  customers  with
high-quality and cost-effective  hearing care products and services while at the
same  time  increasing  its  operating   margins  by  attracting  and  retaining
customers,  recruiting  qualified  and  productive  hearing care  professionals,
achieving economies of scale and administrative efficiencies, and pursuing large
group and managed care contracts.

Attracting and Retaining  Customers.  The Company seeks to attract new customers
and  retain  existing  customers  at each  center by  providing  customers  with
friendly, comprehensive, and cost-effective hearing care at convenient times and
locations.  In addition,  by educating customers about hearing health issues and
by providing  quality  service  during  office  visits and  consistent  customer
follow-up and support, the Company hopes to foster customer loyalty and increase
the  likelihood of obtaining  referrals and repeat visits for  examinations  and
product purchases.

Recruiting  Qualified and Productive  Hearing Care  Professionals.  Hearing care
professionals  employed  by the  Company are  primarily  responsible  for center
profitability  as well as for  attracting and retaining  customers.  The Company
seeks  to  employ  individuals  who  share  the  Company's  goal  of  delivering
high-quality  hearing care services and who are also  dedicated to expanding and
enhancing  their  practices.  The Company has developed an intensive  three-week
training   course  called  the  Greenhouse   Program(R)  for  its  hearing  care
professionals  that  focuses  on  clinical  skills as well as  private  practice
business  management.  Greenhouse  participants  are  instructed  by some of the
hearing health industry's most accomplished and experienced  professionals.  The
Company  believes that the  Greenhouse  Program(R)  can  significantly  increase
employee  performance  and  improve  customer  service.   Greenhouse  Program(R)
graduates consistently rank among the Company's top performers. The Company also
believes that it can offer significant benefits to hearing care professionals in
private practice by providing assistance in administrative tasks associated with
operating a hearing care  practice,  thereby  allowing  them to focus on serving
customers and increasing productivity.

Achieving  Economies of Scale and Administrative  Efficiencies.  A key operating
strategy  of  the  Company  is to  achieve  increased  economies  of  scale  and
administrative  efficiencies at each of its hearing care centers.  When a center
is  acquired  by the  Company,  it  immediately  has  available  to it terms and
discounts  with  hearing  instrument   manufacturers  that  are  generally  more
favorable  than it could  negotiate  independently.  In  addition,  the  Company
believes that by centralizing  certain management and  administrative  functions
such as marketing,  billing,  collections,  human  resources,  risk  management,
payroll, and general accounting  services,  the profitability of a center can be
improved by spreading the cost of such functions over a larger revenue base.

Pursue Large Group and Managed Care  Contracts.  Although the Company intends to
continue to aggressively pursue  private-payor  business because it is presently
more pervasive and profitable than managed care business,  the Company  believes
that by  providing  comprehensive  geographic  coverage in a  particular  market
through its Company-owned  centers,  members of The Sonus Network,  and the over
1,400  hearing  centers  affiliated  with  its  Hear PO  subsidiary,  it is well
positioned  to offer  hearing care  services to managed care group and corporate
health care  organizations in that market.  Managed care arrangements  typically
shift some of the economic  risk of providing  customer care from the person who
pays for the care to the provider of the care by capping fees, requiring reduced



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fees,  or  paying a set fee per  customer  irrespective  of the  amount  of care
delivered.  With  respect to hearing  care,  such limits could result in reduced
payments  for  services  or  restrictions  on the  types of  services  for which
reimbursement  is available  or the  frequency  of  replacements  or upgrades of
equipment.  At the present time,  managed care  penetration  of the hearing care
market is  limited.  However,  if managed  care  begins to play a larger role in
hearing care, the Company may be required to increase  capital  expenditures and
allocate additional resources in order to develop information systems to improve
productivity,  manage  complex  reimbursement  methodologies,  measure  customer
satisfaction  and outcomes of care,  and  integrate  information  from  multiple
sources.

      Many  third-party  insurers impose  restrictions in their health insurance
policies on the  frequency  with which  hearing  instruments  may be upgraded or
replaced on a reimbursable  basis.  Such  restrictions have a negative impact on
hearing  instrument  sales volume.  There can be no guarantee that such insurers
will not implement  other policy  restrictions in the future in order to further
minimize reimbursement for hearing care. Such restrictions could have a material
adverse effect on the Company's business,  financial  condition,  and results of
operations.

CENTER STAFFING AND FACILITIES

      Typically,  each Company-owned hearing center is staffed with at least one
audiologist  and one  customer  care  coordinator  who  handles  scheduling  and
clerical  functions.  Where volume  warrants,  a center may also be staffed with
additional  audiologists,  hearing  instrument  dispensers,  and  customer  care
coordinators.  An  audiologist  employed  by the  Company has a masters or Ph.D.
degree in audiology.  The  audiologist is licensed by the  appropriate  state or
province  to  dispense  hearing  instruments  and is a  member  of the  American
Speech-Language   Hearing   Association   or   the   Canadian   Association   of
Speech/Language Pathologists and Audiologists.

      Each of the Company's hearing centers operates in leased space that ranges
in size from 800 to 3,000  square  feet  depending  on  customer  volume and the
extent of services  provided by the center.  Centers  generally have a reception
seating area, a reception work and filing area, an office for the audiologist or
hearing  instrument  dispenser,  a laboratory for hearing instrument repairs and
modifications,  a  technology  demonstration  room,  and an  evaluation  room. A
properly equipped office offering only hearing rehabilitation  services requires
equipment  that costs  $50,000 to $75,000.  The cost of  equipment  for a center
offering  advanced  audio-diagnostic  services  is much  greater and ranges from
$225,000 to $250,000.

PRODUCTS AND SUPPLIERS

      The hearing instrument  manufacturing  industry is highly competitive with
approximately 40 manufacturers  serving the worldwide market.  Few manufacturers
offer significant product differentiation.  The Company currently purchases most
of its hearing instruments from three top hearing instrument manufacturers based
upon  criteria  that  include   quality,   price,   and  service.   These  three
manufacturers   also  produce  the   Company's   Sonus   Solution(TM)   line  of
private-label  digital  hearing  instruments.  Hearing  instruments in the Sonus
Solution(TM) line come with a three-year  service warranty,  a three-year supply
of batteries,  a 75-day return policy and free office visits including  cleaning
and adjustments.  The Sonus Solution(TM) line is available only at Company-owned
and Sonus Network locations.  In addition to hearing instruments,  the Company's
hearing care centers also offer a limited selection of other assistive listening
devices and hearing instrument accessories.

MARKETING

      The  Company's  marketing  program is designed  to help its  hearing  care
centers retain existing customers and expand the services they receive,  attract
new customers, and develop contracts to serve large groups of customers.

      The Company  believes that customer  satisfaction  is the key to retaining
and  expanding  services to existing  customers.  The Company also believes that
delivering  comfortable,  high-quality  hearing care at times and locations that
are  convenient  for the  customer  will  motivate  customers  to  return to the
Company's centers for their future hearing care needs. Educating customers about
hearing health, prescribing only necessary hearing enhancing



                                       8
<PAGE>


products,  ensuring  that  each  customer  leaves a center  with a future  visit
already scheduled, and maintaining consistent customer follow-up and support are
key elements of the Company's plan to build customer loyalty and patronage.

      After a customer has obtained a hearing  instrument,  ongoing revenues are
generated from battery purchases and routine maintenance of the instruments. The
Company  believes that repeat  revenues are  attributable  to the length of time
that a  center  has  been  established  and the  effectiveness  of its  customer
retention programs.

      The Company believes that the same aspects of the Company's  approach that
earn the loyalty of current  customers  will also  generate new  customers.  The
Company's  customer marketing programs are designed to help the Company generate
referrals  from  physicians  and existing  customers  and increase the Company's
visibility  in the  community.  The Company  seeks to foster such  visibility by
developing  marketing  materials and  information  sources that  communicate the
Company's  philosophy  of  high-quality,   customer-oriented  hearing  care.  In
addition to advertising in local newspapers, the Company also places advertising
in premier  national  publications  such as  Reader's  Digest  (Mature  Select),
Reader's  Digest Large  Edition For Easier  Reading,  New Choices,  and Saturday
Evening Post.

      The  Company's  large group  marketing  approach is designed to enable the
Company to develop contacts with self-insured employers and with health plans in
the  metropolitan  areas it serves and  emphasizes the  convenience,  quality of
care, and wide range of services offered by the Company.  The economies of scale
available to the Company may also allow health plans and self-insured  employers
served by the  Company to reduce  administrative  burdens  they might  otherwise
face. The Company  believes that it is well  positioned to respond to challenges
presented by the growth of managed care arrangements as they arise.

COMPETITION

      The  hearing  care  industry  in the  United  States  and Canada is highly
fragmented  and intensely  competitive.  Many of the Company's  competitors  are
small  retailers  that  focus  primarily  on the  sale of  hearing  instruments.
However,  the Company also competes on a regional  basis with other  networks of
hearing care centers such as Hearx Ltd. ("Hearx"), Helix Hearing Care of America
Corp.  ("Helix"),  Newport Audiology Centers,  and American Hearing Centers,  as
well as with  Beltone  and  Miracle-Ear,  two  large  manufacturers  of  hearing
instruments that distribute  directly to consumers  through national networks of
franchised   centers.   Beltone  and  Miracle-Ear  place  a  heavy  emphasis  on
advertising and enjoy significant consumer brand name recognition. In July 2001,
Hearx and Helix  announced that they had signed a definitive  agreement to merge
the two companies  and that the name of the combined  company would be HEAR USA,
Inc.  The  companies  have  stated  that the  transaction,  which is  subject to
shareholder,  Canadian  court,  and  regulatory  approval,  is expected to close
before  the end of  December  2001.  Hearx and Helix  also  recently  obtained a
substantial   financing  commitment  from  Siemens  Hearing  Instruments,   Inc.
("Siemens"),  a major hearing instrument  manufacturer.  The Company anticipates
that the merger, along with the financing  commitment,  will result in increased
competition  for retail  customers  in those areas  where the  Company  competes
directly with Hearx or Helix, as well as increased  competition for hearing care
practices that the Company seeks to acquire.  There can be no assurance that one
or more of these  competitors  will not seek to compete  directly in the markets
targeted  by the  Company,  nor can  there be any  assurance  that  the  largely
fragmented  hearing care market  cannot be  successfully  consolidated  by other
companies   or  through   the   establishment   of   co-operatives,   alliances,
confederations or similar associations.

      The Sonus  Network  competes for members with groups such as The Audiology
Co-Op,  American  Hearing Aid  Associates,  and Hear USA  Advantage  Network,  a
recently formed network of hearing  providers,  that have been formed to provide
small hearing  instrument  retailers with shared economies of scale and, in some
cases,  access to managed care  contracts.  The Sonus  Network also competes for
members to a lesser  extent with mature  franchise  systems  such as Beltone and
Miracle-Ear. The Company expects that competition for members among these groups
will increase  significantly in the future,  particularly  with the formation of
the Hear USA Advantage Network.


                                       9
<PAGE>



REGULATION

      The sale of hearing  instrument  devices is regulated at the federal level
in the United States by the United States Food and Drug Administration  ("FDA"),
which has been granted  broad  authority to regulate the hearing care  industry.
Under federal law, hearing  instruments may only be sold to individuals who have
first obtained a medical evaluation from a licensed physician,  although a fully
informed adult may waive a medical evaluation in certain instances.  Regulations
promulgated  by the FDA  also  presently  require  that  dispensers  of  hearing
instruments  provide  customers with certain  warning  statements and notices in
connection  with the sale of hearing  instruments and that such sales be made in
compliance with certain labeling requirements.

      Most  states in the  United  States  and many  provinces  in  Canada  have
established  formal  licensing  procedures  that  require the  certification  of
audiologists   and/or  HISs.   Although  the  extent  of  regulation  varies  by
jurisdiction, almost all states and provinces engage in some degree of oversight
of the  industry.  The Company  operates its hearing  care  centers  through its
wholly  owned  subsidiaries,  Sonus-USA,  Sonus-Texas,  Sonus-Canada,  and Sonus
Acquisition. These subsidiary corporations employ licensed audiologists and HISs
who offer and perform  audiology  services and dispense  hearing  instruments on
behalf of the Company.

      In certain  states in the United  States,  business  corporations  such as
Sonus-USA  may not be  authorized  to employ  audiologists  and offer  audiology
services.  For example,  in California,  where the Company  operates a number of
centers,   although  the  performance  of  audiology  services  by  professional
corporations owned solely by licensed audiologists is expressly authorized under
California  law, it is unclear  whether general  business  corporations  such as
Sonus-USA  may  employ  licensed  audiologists  to perform  audiology  services.
However,  the  California  Department  of  Consumer  Affairs  has  indicated  by
memorandum that speech-language pathologists, which are regulated under statutes
and  regulations  similar to those  governing  audiologists,  may  practice in a
general business corporation and that a general business corporation may provide
speech-language  pathology  services  through licensed speech  pathologists.  In
Illinois,  where the  Company  also  operates  a number of  centers,  it is also
unclear whether general business  corporations may employ licensed  audiologists
to  perform   audiology   services.   Under  Illinois  law,  only   professional
corporations  and  individuals  are  authorized  to obtain  licenses to practice
audiology.

      The laws and regulations  governing the practice of audiology are enforced
by regulatory agencies with broad discretion. If the Company were found to be in
violation of such laws and regulations in one or more states,  the  consequences
could include the  imposition  of fines and  penalties  upon the Company and its
audiologists  as well as the  issuance of orders  prohibiting  the Company  from
operating  its centers  under its present  structure.  In that event,  among the
solutions  the Company might  consider  would be the  restructuring  of all or a
portion of its  operations in a manner  similar to that used by certain  medical
and dental center networks.  Under such a structure,  professional  corporations
owned by  licensed  audiologists  would  contract  with the  Company  to perform
professional  services  and the Company  would  contract  with the  professional
corporations to provide management services.

      No assurance can be given that the Company's  activities  will be found to
be in compliance with laws and regulations  governing the corporate  practice of
audiology or, if its  activities  are not in  compliance,  that the  operational
structure of the Company can be modified to permit compliance.  In addition,  no
assurance  can be given  that other  states or  provinces  in which the  Company
presently  operates will not enact  prohibitions  on the  corporate  practice of
audiology or that the  regulatory  framework of certain  jurisdictions  will not
limit the  ability  of the  Company  to expand  into such  jurisdictions  if the
Company  is unable to  modify  its  operational  structure  to comply  with such
prohibitions or to conform with such regulatory  framework.  Additional laws and
regulations  may be adopted in the future at the  federal,  state,  or  province
level  that  could have a material  adverse  effect on the  business,  financial
condition, and results of operations of the Company.

      A portion of the  revenues of the  hearing  care  centers  operated by the
Company  comes from  Medicare and Medicaid  programs.  Federal law prohibits the
offer,  payment,  solicitation  or receipt of any form of remuneration in return
for, or in order to induce,  (i) the referral of a Medicare or Medicaid patient,
(ii) the  furnishing  or  arranging  for



                                       10
<PAGE>


the  furnishing  of items or services  reimbursable  under  Medicare or Medicaid
programs  or  (iii)  the  purchase,  lease  or  order  of any  item  or  service
reimbursable  under  Medicare  or  Medicaid.   Noncompliance  with  the  federal
anti-kickback  legislation  can result in exclusion  from  Medicare and Medicaid
programs and civil and criminal penalties.

      During the year ended July 31, 2001,  the Company  discovered  that it had
improperly  submitted certain claims to the State of California Medi-Cal program
("Medi-Cal")  for  hearing   services  and  instruments   provided  to  Medi-Cal
enrollees,  as a result of services being performed by audiologists  and hearing
instrument  dispensers who had not been  credentialed  by Medi-Cal.  The Company
determined that it had received $474,000 and $566,000 during calendar years 2000
and 1999,  respectively,  that related to these improperly submitted claims. The
Company reported its discovery to Medi-Cal and received a response acknowledging
the Company's  representations to Medi-Cal that steps have been taken to prevent
a  reoccurrence.  Medi-Cal has not requested  that the Company repay the amounts
received and management  believes that it is unlikely that Medi-Cal will request
repayment in the future.  However, the ultimate  determination of this matter is
presently  unknown  and could have a material  adverse  effect on the  Company's
financial position, operating results, and cash flows.

PRODUCT AND PROFESSIONAL LIABILITY; PRODUCT RETURNS

      In the  ordinary  course of its  business,  the  Company may be subject to
product and  professional  liability  claims alleging the failure of, or adverse
effects  claimed to have been caused by,  products sold or services  provided by
the Company. The Company maintains insurance against such claims at a level that
the Company believes is adequate.  A customer may return a hearing instrument to
the Company and obtain a full refund up to 60 days (75 days for certain  models)
after  the  date of  purchase.  In  general,  the  Company  can  return  hearing
instruments  returned  by  customers  within  the return  period  allowed by the
Company to the manufacturer for a full refund.

EMPLOYEES

      At  October  1, 2001,  the  Company  had 296  full-time  and 70  part-time
employees,  of  whom  98  are  audiologists  or  hearing  instrument  dispensers
practicing  full time and 37 are  practicing  part-time.  None of the  Company's
employees are  represented  by a labor union.  Management  believes it maintains
good relationships with its employees.

ITEM 2. PROPERTIES

      The  Company's  executive  offices  are  located in 15,967  square feet of
leased office space in downtown Portland, Oregon. The lease expires on September
30, 2004,  and provides for an annual base rent of $292,080  until  December 31,
2001,  when the annual base rent increases to $318,818 until September 30, 2003,
and then to $356,678  from  October 1, 2003 to September  30, 2004.  Each of the
Company's  hearing centers operates in leased space that ranges in size from 800
to 3,000 square feet.  Approximately  65% of the locations are leased for one to
eight-year  terms  pursuant to generally  non-cancelable  leases  (with  renewal
options in some cases) with the remaining  locations  leased on a month-to month
basis.  The  aggregate  committed  rental  expense as of July 31, 2001,  for the
subsequent five-year period is approximately $4.4 million.

ITEM 3. LEGAL PROCEEDINGS

      In May 2001,  Sonus-USA filed a breach of contract  lawsuit in the Circuit
Court of the State of Oregon for the County of Multnomah  against  Siemens.  The
lawsuit,  which was moved to the  Federal  District  Court for the  District  of
Oregon,  seeks  damages  in excess of $4.3  million  and  alleges  that  Siemens
breached  its  obligations  under a hearing  instrument  supply  agreement  with
Sonus-USA by unilaterally revoking the pricing schedule under the contract.  The
lawsuit  also  alleges  that Siemens  breached  additional  obligations  under a
separate contract with Sonus-USA.  Siemens has filed a counterclaim  against the
Company alleging that Siemens is owed $920,000 for hearing instruments purchased
by the Company on account and  $104,000  for  failure to pay a  promissory  note
assumed by the Company.  As this litigation is in its early stages,  management,
in consultation  with outside legal counsel,  has not finalized an opinion as to
the ultimate outcome.


                                       11
<PAGE>



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   Not applicable.


                                   PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON SHARES

      The Company's  common shares ("Common  Shares") are traded on the American
Stock  Exchange.  The following table sets forth the reported high and low sales
prices in United States dollars for the Common Shares for the periods indicated:

        FISCAL YEAR                     PERIOD        HIGH    LOW
        -----------                     ------        ----    ---
        2000..................... First Quarter      $4.500  $3.125
                                  Second Quarter     $5.000  $2.750
                                  Third Quarter      $5.500  $3.438
                                  Fourth Quarter     $3.625  $2.750

        2001..................... First Quarter      $4.500  $2.625
                                  Second Quarter     $4.000  $1.250
                                  Third Quarter      $3.000  $1.750
                                  Fourth Quarter     $3.100  $1.900

-------------------------

HOLDERS AND DIVIDENDS

      As of October 1, 2001, there were 54 holders of record of Common Shares.

      For as long as Warburg, Pincus Ventures,  L.P., beneficially owns at least
666,666 Series A Convertible  Preferred Shares or Series B Convertible Preferred
Shares or the Common Shares into which such  preferred  shares are  convertible,
the  Company  may not,  without  such  holder's  consent,  pay any  dividend  or
distribution  on its Common  Shares.  In addition,  the Company's line of credit
with a commercial bank includes a minimum net worth  requirement  that may limit
the  payment of  dividends.  The Company  has paid no cash  dividends  since its
inception.

CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

      Following  is a summary  of the  principal  Canadian  federal  income  tax
considerations  under  the  Income  Tax Act  (Canada)  (the  "Tax  Act") and the
regulations  thereunder  generally  applicable to a holder of Common Shares who,
for purposes of the Tax Act, holds such shares as capital  property and deals at
arm's length with the Company. Generally, Common Shares will be considered to be
capital property to a holder provided the holder does not hold the Common Shares
in the course of carrying on a business of trading or dealing in securities  and
has not acquired them in one or more transactions  considered to be an adventure
in the nature of trade. Special rules apply to non-resident  insurers that carry
on an insurance business in Canada and elsewhere.

      This  summary is based upon the  provisions  of the Tax Act in force as of
the date  hereof,  all  specific  proposals  to amend the Tax Act that have been
publicly announced prior to the date hereof (the "Proposed  Amendments") and the
Company's  understanding of the current published  administrative  and assessing
policies  and  practices  of the



                                       12
<PAGE>


Canada Customs and Revenue Agency. For the purposes of this summary, it has been
assumed that the Tax Act will be amended as proposed,  although no assurance can
be given in this regard.  This summary is not exhaustive of all possible federal
income tax  consequences  and,  except  for the  Proposed  Amendments,  does not
anticipate  any  changes in the law,  whether by  legislative,  governmental  or
judicial  decision  or  action,  nor  does  it  take  into  account  provincial,
territorial or foreign tax considerations,  which may differ  significantly from
those  discussed  herein.  This  summary is not  applicable  to holders  who are
"specified financial institutions" for purposes of the Tax Act, a holder that is
a  "financial  institution"  as  defined  in the  Tax Act  for  purposes  of the
mark-to-market  rules,  or to a holder if an interest in such holder  would be a
"tax shelter investment" as defined in the Tax Act.

      This  summary is of a general  nature only and is not  intended to be, and
should not be  construed to be,  legal or tax advice to any  particular  holder.
Accordingly,  holders should consult their  independent  tax advisers for advice
with  respect  to the  income  tax  consequences  relevant  to their  particular
circumstances.

      The following  applies to holders of Common Shares who are not resident in
Canada for purposes of the Tax Act and who hold their  Common  Shares as capital
property and deal at arm's length with the Company.

Dispositions of Common Shares. A non-resident holder will, upon a disposition or
deemed disposition of Common Shares, not be subject to taxation in Canada on any
gain  realized  on the  disposition  unless  the shares  are  "taxable  Canadian
property"  for the  purposes of the Tax Act and no relief is  afforded  under an
applicable  tax  convention  between  Canada and the country of residence of the
holder.  Since the Common Shares are listed on a prescribed  stock  exchange for
the purposes of the Tax Act,  Common Shares held by a  non-resident  holder will
generally  not be "taxable  Canadian  property"  unless,  at any time during the
five-year period immediately preceding the disposition, the non-resident holder,
persons with whom the non-resident  holder did not deal at arm's length,  or the
non-resident  holder  together  with  such  persons,  owned or had the  right to
acquire 25% or more of the issued  shares of any class of the  capital  stock of
the  Company.  Any  interest  in shares or options in respect of shares  will be
considered to be the  equivalent of ownership of such shares for purposes of the
definition of taxable Canadian property.

      Non-residents  whose shares constitute "taxable Canadian property" will be
subject to taxation in respect of a disposition or deemed  disposition of Common
Shares on the same basis as Canadian  residents unless otherwise  exempted by an
applicable  tax  convention  between  Canada and the country of residence of the
holder.

      Pursuant to the  Canada-United  States  Income Tax  Convention,  1980 (the
"Convention"),  shareholders  of the Company  that are  residents  in the United
States for the purposes of the  Convention  and whose shares might  otherwise be
"taxable  Canadian  property" may be exempt from Canadian taxation in respect of
any gains on the  disposition  of the Common  Shares,  provided the value of the
Company is not derived  principally  from real property located in Canada at the
time of disposition.

      Non-resident  holders  who might  hold  their  Common  Shares as  "taxable
Canadian  property"  should  consult  their own tax advisers with respect to the
income tax consequences of a disposition of their Common Shares.

      Non-resident  holders whose shares are repurchased by the Company,  except
in respect of certain purchases made by the Company in the open market,  will be
deemed to have  received  the  payment of a dividend by the Company in an amount
equal to the  excess of the  proceeds  over the  paid-up  capital  of the Common
Shares so  purchased.  Such deemed  dividend  will be excluded from the holder's
proceeds of  disposition  of the Common Shares for the purposes of computing any
capital  gain or loss but will be subject to Canadian  non-resident  withholding
tax in the manner described below under "Dividends."


                                       13
<PAGE>



Dividends.  Dividends received by a non-resident holder of Common Shares will be
subject  to  Canadian  withholding  tax at the rate of 25% of the  gross  amount
thereof  unless the rate is reduced under the  provisions  of an applicable  tax
convention  between  Canada and the  country of  residence  of the  holder.  The
provisions  of the  Convention  generally  reduce  the  rate to 15%.  A  further
reduction to 5% under the Convention  will be available if the beneficial  owner
is a company, which owns at least 10% of the voting shares of the Company.

INVESTMENT CANADA ACT

      The Investment Canada Act (the "ICA") prohibits the acquisition of control
of a Canadian  business  by  non-Canadians  without  review and  approval of the
Investment  Review Division of Industry Canada,  the agency that administers the
ICA,  unless such  acquisition is exempt from review under the provisions of the
ICA. The Investment  Review Division of Industry Canada must be notified of such
exempt  acquisitions.  The ICA  covers  acquisitions  of  control  of  corporate
enterprises,  whether by purchase of assets,  shares or "voting interests" of an
entity that  controls,  directly or  indirectly,  another  entity  carrying on a
Canadian business.

      Apart  from  the  ICA,  there  are no other  limitations  on the  right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Company's  Articles.  There are no other decrees or regulations in Canada
that  restrict  the  export or import of  capital,  including  foreign  exchange
controls, or that affect the remittance of dividends, interest or other payments
to  nonresident  holders of the  Company's  Common  Shares,  except as discussed
elsewhere herein.

SALES OF UNREGISTERED SECURITIES DURING FISCAL 2001

      There were no securities of the Company issued without  registration under
the Securities Act of 1933 during the fiscal year ended July 31, 2001, except as
previously reported in the Company's quarterly reports on Form 10-Q filed during
the fiscal year.

ITEM 6. SELECTED FINANCIAL DATA

      The following  selected  financial  data of the Company  should be read in
conjunction  with the  consolidated  financial  statements and notes thereto and
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.


                                       14
<PAGE>



      Statement of Operations Data (in thousands, except per share data):
<TABLE>
<CAPTION>

                                                                                Years Ended July 31,
                                                              2001         2000         1999         1998         1997
                                                              ----         ----         ----         ----         ----
<S>                                                          <C>          <C>            <C>        <C>          <C>
Net revenues                                                 $48,934      $43,959        $33,759    $22,368      $13,462
Costs and expenses:
     Cost of products sold                                    16,391       12,887         10,766      7,712        5,010
     Clinical expenses                                        19,904       19,494         17,406     11,885        5,938
     Provision for doubtful accounts (1)                         851        2,691            389        412           47
     General and administrative expenses                      13,248        8,778          7,583      5,896        3,410
     Depreciation and amortization                             3,921        3,109          2,450      1,361          790
                                                               -----        -----          -----      -----          ---

Total costs and expenses                                      54,315       46,959         38,594     27,266       15,195
                                                              ------       ------         ------     ------       ------

Loss from operations                                          (5,381)      (3,000)        (4,835)    (4,898)      (1,733)
Other income (expense), net                                      136         (101)           (49)       304           32
Loss before cumulative effect of change in accounting
principle                                                     (5,245)      (3,101)        (4,884)    (4,594)      (1,701)
Cumulative effect of change in accounting principle (2)
                                                              (2,114)         ---            ---        ---          ---
                                                              ------       ------         ------     ------       ------

Net loss                                                      (7,359)      (3,101)        (4,884)    (4,594)      (1,701)
Deemed dividends to preferred shareholder (2)                 (7,355)         ---            ---        ---          ---
                                                              ------       ------         ------     ------       ------
Net loss attributable to common shareholders                $(14,714)     $(3,101)       $(4,884)   $(4,594)     $(1,701)
                                                            ========      =======        =======    =======      =======
</TABLE>

<TABLE>
<CAPTION>

<S>                                                           <C>          <C>          <C>          <C>          <C>
Per share data:
Basic and diluted loss per share before
 cumulative effect of change in accounting principle
 and deemed dividends to preferred shareholder                $(0.86)      $(0.51)      $(0.80)      $(0.89)      $(0.42)

Cumulative effect of change in accounting principle
                                                               (0.35)         ---          ---          ---          ---
Deemed dividends to preferred shareholder                      (1.20)         ---          ---          ---          ---
                                                          -----------------------------------------------------------------
Net loss attributable to common shareholders (basic and
diluted)                                                      $(2.41)      $(0.51)      $(0.80)      $(0.89)      $(0.42)
                                                          =================================================================

Pro forma amounts, assuming the change in accounting
 principle was applied retroactively:

Net loss attributable to common shareholders                 $(12,600)     $(3,952)     $(6,147)        *            *
Net loss per common share (basic and diluted)                $  (2.06)     $ (0.65)     $ (1.01)        *            *

                                                              2001           2000         1999         1998         1997
                                                              ----           ----         ----         ----         ----
Cash dividends declared per common share                      none           none         none         none         none
</TABLE>

*Data to compute pro forma amounts for fiscal 1998 and 1997 is unavailable.

------------------------------

(1)As more fully discussed in Note 1 to the "Consolidated Financial Statements,"
   during the year ended July 31, 2000, the Company  increased the provision for
   doubtful accounts due to information systems and other issues.

(2)As more  fully  discussed  in  Notes 1 and 8 to the  "Consolidated  Financial
   Statements,"  during the year ended July 31,  2001,  the Company  changed its
   method of  accounting  for revenue and method of accounting  for  convertible
   securities  with  beneficial  conversion  features.


                                       15
<PAGE>
      Balance Sheet Data (in thousands):


                                                As of July 31,
                                      2001     2000     1999     1998     1997
                                      ----     ----     ----     ----     ----
Total assets                        $40,299  $37,784   $31,385 $34,129  $16,544
Long-term obligations, less
current portion                     $   861  $ 1,259   $ 2,593 $ 3,126  $ 1,197

ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

      During  the 2001  fiscal  year,  the  Board of  Directors  of the  Company
recognized  there were  significant  problems  managing  the rapid growth of the
business and that the financial condition of the Company had not improved during
fiscal 2001 as evidenced by increases in accounts receivable,  other receivables
and  accounts  payable.  As a result,  the  Company  implemented  the  following
business initiatives beginning in the fourth quarter of fiscal 2001:

o     A new Chief Executive  Officer and Chief  Financial  Officer were hired. A
      new Chief Information Officer and Vice  President-Marketing  were added in
      the first quarter of fiscal 2002.

o     The  Company  increased  the  number  of  employees  in its  Reimbursement
      Department from 10 to 19.

o     A  $20,000,000  line of  credit  and  related  seven-year  product  supply
      agreement were executed with a major hearing instrument manufacturer.  The
      line of credit provides the Company with capital to pursue  acquisition of
      independent  hearing clinics,  while the product supply agreement provides
      for  improved   pricing  and   commissions   to  the  Company  on  hearing
      instruments.

o     Negotiations  were  initiated  with two  other  major  hearing  instrument
      manufacturers for the purpose of securing long-term supply relationships.

o     An  independent  information  technology  firm was  engaged  to assess the
      Company's  information systems and make  recommendations for improving the
      current information systems environment.

o     Acquisitions  of hearing care practices were curtailed  until such time as
      new  management is satisfied that the Company's  acquisition  criteria and
      infrastructure are both appropriate and adequate.

As a result of the ongoing implementation of these initiatives,  the Company has
positioned  itself for  improved  financial  results.  However,  there can be no
assurance  that the  Company  will be  successful  in  improving  its  financial
performance.

OVERVIEW OF FISCAL 2001

      For the fiscal  year ended July 31,  2001,  the  Company  generated  total
revenues of $48.9  million,  an increase of 11% over fiscal 2000. For the fiscal
year ended July 31,  2001,  the Company  incurred a loss  before the  cumulative
effect of a change in  accounting  principle  of $5.2  million,  compared to the
fiscal 2000 loss of $3.1 million. As of July 31, 2001, the Company's accumulated
deficit was $22.1 million and its total shareholders' equity was $18.0 million.


                                       16
<PAGE>



ACQUISITIONS

      During the fiscal year ended July 31,  2001,  the Company  acquired  eight
hearing care centers in eight  transactions.  The Company also  consolidated  10
centers  into  existing  centers  during  the  fiscal  year  in  order  to  more
efficiently  allocate  its  resources.  The  aggregate  purchase  price  for the
acquisitions consisted of cash payments of $177,000,  promissory notes issued by
the Company of $393,000  generally  payable over three years,  $16,000 of common
stock, and $12,000 in assumed liabilities. As a result of the acquisitions,  the
Company recorded  approximately  $141,000 in property and equipment,  $15,000 in
other assets, $402,000 in goodwill, and $40,000 for covenants not to compete.

      The eight  hearing  care  businesses  acquired by the  Company  during the
fiscal year ended July 31, 2001,  have  combined  historical  revenues for their
immediately  preceding fiscal years of approximately  $2.1 million.  The Company
expects these centers to contribute to the Company's future revenues  consistent
with their  historical  revenues,  as well as to have a positive  effect on cash
flows and liquidity.

      As of July 31, 2001, the Company had recorded  $21,336,000 in goodwill and
$2,274,000  in  covenants  not  to  compete.  The  unamortized  balance  totaled
$18,561,000  at  July  31,  2001,  which  represented  approximately  46% of the
Company's total assets and 103% of the Company's shareholders' equity.

INTANGIBLE ASSETS

      The  Company's  intangible  assets have arisen due to the  acquisition  of
hearing centers.  Management reviews  intangible assets for impairment  whenever
events or changes in circumstances  indicate that the carrying amount may not be
recoverable. Such events could include, but are not limited to, the inability of
hearing centers to achieve planned growth rates and  profitability,  or the loss
of a key supplier or vendor.  Impairment  is measured by comparing  the carrying
value of the intangible assets to the estimated  undiscounted  future cash flows
expected to result  from use of the assets and their  ultimate  disposition.  In
circumstances  where  impairment is determined to exist,  the Company will write
down the  asset to its  fair  value  based  on the  present  value of  estimated
expected future cash flows. Because management's impairment analysis is based on
estimates of future cash flows,  there is a reasonable  possibility  that future
analyses may indicate  that the  Company's  intangible  assets are impaired to a
greater  degree if  actual  cash  flow  results  materially  differ  from  these
estimates.

      As indicated under "Accounting  Pronouncements" below, the Company will be
required to adopt the provisions of two new accounting  pronouncements that will
directly  affect  intangibles  and  other  long-lived  assets  and  management's
requirements  to assess  the  impairment  of these  assets.  Management  has not
completed its assessment of the impact of these  pronouncements  on the Company,
but expects that the Company will no longer amortize its goodwill.  Amortization
totaled $1,100,000 for the year ended July 31, 2001.

INCOME TAXES

      There was no  provision  for income tax  expense or benefit for any period
since inception due to the Company's  operating losses. As of July 31, 2001, the
Company had  approximately  $19,100,000 of net operating loss  carryforwards for
federal  income tax purposes,  which expire from 2011 to 2021.  The Company also
had  approximately  $3,000,000 of net operating loss  carryforwards for Canadian
income tax purposes,  which expire from 2002 to 2008.  The Company would need to
generate a minimum of  $22,100,000 of future taxable income to fully realize the
deferred tax assets. Due to the issuance and sale of Series A preferred stock in
1997, the Company incurred ownership changes pursuant to applicable  regulations
in effect under the Internal  Revenue Code of 1986, as amended.  Therefore,  the
use of losses incurred  through the date of the ownership change will be limited
during the carryforward  period.  To the extent that any single-year loss is not
utilized to the full amount of the limitation,  such unused loss is carried over
to subsequent  years until the earlier of its  utilization  or the expiration of
the relevant carryforward period.



                                       17
<PAGE>


      Deferred tax assets consist primarily of net operating loss  carryforwards
and the allowance  for doubtful  accounts.  Because of the Company's  history of
operating  losses,  management does not have a sufficient  basis to project that
future  income will be  sufficient to realize the deferred tax assets during the
carryforward  period.  As a result,  the Company has  provided a full  valuation
allowance  on the net  deferred  tax  assets  for  all  periods  presented.  The
valuation  allowance has increased each fiscal year primarily due to that fiscal
year's net  operating  loss  carryforward  and the increase in the allowance for
doubtful accounts.

RESULTS OF OPERATIONS

Year Ended July 31, 2001, Compared to Year Ended July 31, 2000

      Revenues.  Net  revenues  for the fiscal  year ended July 31,  2001,  were
$48,934,000,  representing  an 11% increase over net revenues of $43,959,000 for
the prior fiscal year. The increase was due to increased revenues from The Sonus
Network and Hear PO Corp. of $9,389,000, which were offset by a decrease in same
store revenue for Company-owned hearing centers of 15% for the fiscal year ended
July 31, 2001  compared to the fiscal year ended July 31, 2000.  The decrease in
same store  revenue  reflected  a slowing  economy  and  decreased  sales in the
hearing  industry.  Product sales revenues were  $34,997,000 for the 2001 fiscal
year, down 6% from  $37,252,000 for fiscal 2000.  Audiological  service revenues
increased 26% from  $3,589,000 in fiscal 2000 to $4,539,000  for the 2001 fiscal
year. The increase in service  revenue  resulted  primarily from the adoption of
Securities and Exchange  Commission Staff Accounting Bulletin No. 101, discussed
below.  Other  revenues  increased  201%  to  $9,398,000  in  fiscal  2001  from
$3,118,000 in fiscal 2000 due to the rapid growth of The Sonus Network.

      As  further  described  below  under  "Cumulative   Effect  of  Change  in
Accounting  Principle," the Company adopted  Securities and Exchange  Commission
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial  Statements"
("SAB 101")  effective  retroactive  to August 1, 2000.  The adoption of SAB 101
resulted in a reduction of 2001 revenues in the amount of $6,000  (comprised of
revenue in the amount of $1,313,000  that had been recognized in prior years but
was  deferred  under the new rules and  recognized  in 2001,  offset by  revenue
originating in 2001 in the amount of $1,319,000 deferred to future years).

      Gross Profit on Product  Sales.  Product  gross profit for the fiscal year
ended July 31,  2001,  was  $18,606,000  compared to  $24,365,000  for the prior
fiscal  year.  Gross profit  percentage  on product  sales  decreased to 53% for
fiscal  2001 from 65% for fiscal  2000.  The  decrease in product  gross  profit
percentage was due to the  reclassification  of revenue from product  revenue to
service  revenue in  connection  with the  adoption  by the  Company of SAB 101,
increased  sales of lower margin  hearing  aids, a higher  proportion of revenue
from Hear PO Corp.,  which has lower gross  profit  margins  than the  Company's
hearing  care  centers,  and  an  increase  in  the  provision  for  contractual
allowances related to insurance reimbursement.

      Clinical  Expenses.  As a  percentage  of  combined  product  and  service
revenues,  clinical expenses increased to 50% for the fiscal year ended July 31,
2001, compared to 48% for the fiscal year ended July 31, 2000. Clinical expenses
for the fiscal  year ended July 31,  2001,  were  $19,904,000,  representing  an
increase of 2% over clinical  expenses of $19,494,000 for the prior fiscal year.
Approximately  78% of this  increase  was due to increased  personnel  expenses.
Clinical  expenses  include  all  personnel,   marketing,  occupancy  and  other
operating expenses at the center level.

      Provision  for Doubtful  Accounts.  The  Company's  provision for doubtful
accounts  decreased from  $2,691,000 for the fiscal year ended July 31, 2000, to
$851,000  for the fiscal year ended July 31,  2001.  The  decrease  was due to a
$2,300,000  charge that was  incurred  by the  Company in the fourth  quarter of
fiscal  2000 to reflect  the  deterioration  of  accounts  receivable  caused by
certain  events that took place  during  that  quarter.  Without the  $2,300,000
charge taken in fiscal 2000, the provision for doubtful accounts for fiscal 2001
increased $460,000,  or 118%, compared to fiscal 2000,  reflecting  management's
determination  that  additional  reserves for doubtful



                                       18
<PAGE>


accounts  were  necessary  based  on a  review  of  historical  collections  and
outstanding receivables.

      General and  Administrative  Expenses.  As a percentage  of net  revenues,
general and  administrative  expenses increased to 27% for the fiscal year ended
July 31, 2001, versus 20% for the same period in the prior fiscal year.  General
and  administrative  expenses  increased 51% from $8,778,000 for the fiscal year
ended July 31, 2000, to $13,248,000 for the fiscal year ended July 31, 2001. The
increase was due to an increase of  $1,538,000  in personnel  costs  relating to
building the Company's  infrastructure,  $1,705,000 in advertising costs for The
Sonus Network,  $1,152,000 for professional  consulting and accounting fees, and
$260,000 for electronic  connectivity between the Company's hearing care centers
and the corporate headquarters.

      Depreciation  and  Amortization  Expense.  Depreciation  and  amortization
expense for the fiscal year ended July 31, 2001, was $3,921,000,  an increase of
26% over the depreciation  and amortization  expense of $3,109,000 for the prior
fiscal  year.  The  increase  resulted  from the  recognition  of a full year of
depreciation and amortization  expenses related to fixed assets and hearing care
clinics, respectively, purchased during fiscal 2000 and, to a lesser extent, the
depreciation  of  property  and  equipment  and  amortization  of  goodwill  and
covenants not to compete  associated with the eight additional  centers acquired
by the Company during the fiscal year ended July 31, 2001.

      Other Income and Expense.  Interest  income for the fiscal year ended July
31,  2001,  was  $105,000  compared  to  $260,000  for the  prior  fiscal  year,
reflecting  lower balances of short-term  investments.  Interest expense for the
fiscal year ended July 31,  2001,  was  $357,000  compared  to $342,000  for the
fiscal  year  ended  July 31,  2000,  an  increase  of 4%, due to the use of the
Company's bank line of credit and higher  balances of long-term debt incurred in
connection  with  acquisitions  and  capital  expenditures.   The  Company  also
recognized  other income,  net of other expense,  of $388,000 for the year ended
July 31,  2001,  primarily  as the result of  settling a lawsuit  brought by the
Company   against   Starkey   Laboratories,   Inc.  and  other   defendants  for
misappropriation of a customer list owned by the Company.

      Cumulative  Effect of Change in  Accounting  Principle.  During the fourth
quarter of the year ended  July 31,  2001,  the  Company  changed  its method of
accounting  retroactively to August 1, 2000.  Based on guidance  provided in SAB
101 the Company  concluded  that when a sale of a hearing  instrument is coupled
with the  performance  of future  services or  obligations  for free  batteries,
revenue  related to the fair value of the  obligations  should be  deferred  and
recognized as revenue as the obligations are discharged.  The Company's previous
revenue  recognition  policy was to recognize all revenue on the sale of hearing
instruments,  including post-sales services,  at the time the hearing instrument
was  delivered  and to accrue  the cost of  estimated  battery  replacement.  In
accordance  with SAB 101, the Company  recorded a non-cash  charge of $2,114,000
(or $0.35 per share,  basic and diluted) to reflect the cumulative effect of the
change as of August 1, 2000.  Revenue of $1,313,000  included in the  cumulative
effect was  recognized as revenue in the year ended July 31, 2001.  For the year
ended July 31, 2001,  the increase to net loss before the  cumulative  effect of
the change in  accounting  principle  as a result of the adoption of SAB 101 was
$6,000.  For the fiscal year ended July 31, 2001, the Company's net loss before
the  cumulative  effect of the change in  accounting  principle  was  $5,245,000
compared to a net loss of $3,101,000 for the fiscal year ended July 31, 2000. If
the Company had implemented these revenue recognition practices beginning August
1, 1998,  net loss for the years  ended  July 31,  2000 and 1999 would have been
increased by $851,000 and $1,263,000, respectively.

      Deemed  Dividend to  Preferred  Shareholder.  On  issuance,  shares of the
Company's  2,500,000  outstanding  Series B  Convertible  Preferred  Shares (the
"Series B Shares") were  convertible  into common shares on a one for one basis.
However,  the terms of the of the Series B Shares provide that after October 31,
2000, the conversion  rate is subject to upward  adjustment  each fiscal quarter
until the Company attains specified  quarterly  earnings targets.  The amount of
such  quarterly  adjustment is based on a factor of 2% of the original  purchase
price plus the sum of all prior adjustments  until November 1, 2004,  increasing
in steps thereafter to 4.5% beginning November 1, 2006. Once the Company has met
the  specified  earnings  targets  for four  consecutive  quarters,  no  further
adjustment to the conversion  price will be made.  Additionally,  the conversion
price was subject to further adjustment if the Company failed to collect certain
receivables  prior to July 31,  2000.  Because  the  Company  failed to  collect
certain of these  receivables  and did not meet the quarterly  earnings  targets
during  fiscal 2001,  the  conversion  rate was adjusted  such


                                       19
<PAGE>


that the Series B shares are  convertible  into 3,950,214  common shares at July
31,  2001.  The  Emerging  Issues  Task Force  consensus  98-5  "Accounting  for
Convertible  Securities  with  Beneficial  Conversion  Features or  Contingently
Adjustable  Conversion  Ratios" provides that contingent  beneficial  conversion
features are to be recognized when the contingencies are resolved.  Accordingly,
the Company  recorded a deemed  dividend to the holder of Series B Shares in the
amount of $5,801,000 during the year ended July 31, 2001.

      Also in fiscal 2001,  the Company  adopted the Emerging  Issues Task Force
consensus  00-27   "Application  of  Issue  No.  98-5  to  Certain   Convertible
Instruments" (EITF 00-27). Upon the adoption of EITF 00-27, management concluded
that the Series B Shares contained an additional  beneficial  conversion feature
requiring the allocation of the proceeds from the sale of the Series B Shares in
October  1999  between  the  relative  fair  value of the  Series B Shares and a
related modification of warrants to purchase Common Shares held by the holder of
the Series B Shares.  Accordingly,  commensurate with the adoption of EITF 00-27
during the year ended July 31, 2001, the Company  recorded an additional  deemed
dividend to the holder of the Series B Shares in the amount of $1,554,000.

Year Ended July 31, 2000, Compared to Year Ended July 31, 1999

      Revenues.  Net  revenues  for the fiscal  year ended July 31,  2000,  were
$43,959,000,  representing a 30% increase over net revenues of  $33,759,000  for
the prior fiscal year.  The increase was due to the 16 centers  acquired  during
fiscal  2000,  as well as an increase of 5% in  same-store  revenue  compared to
1999.  Product sales revenues were  $37,252,000 for the 2000 fiscal year, up 28%
from the $29,044,000 for fiscal 1999. Audiological service revenues increased 6%
from  $3,392,000  in fiscal 1999 to $3,589,000  for the 2000 fiscal year.  Other
revenues  increased 136% to $3,118,000 in fiscal 2000 from  $1,323,000 in fiscal
1999 due to the rapid growth of The Sonus Network.

      Gross Profit on Product  Sales.  Product  gross profit for the fiscal year
ended July 31,  2000,  was  $24,365,000  compared to  $18,278,000  for the prior
fiscal  year.  Gross profit  percentage  on product  sales  increased to 65% for
fiscal  2000 from 63% for fiscal  1999.  The  increase in product  gross  profit
percentage  was  due to  more  favorable  contracts  with  suppliers,  increased
utilization of the Company's private-label hearing instruments, and better price
management.

      Clinical  Expenses.  As a percentage  of net combined  product and service
revenues,  clinical expenses decreased to 48% for the fiscal year ended July 31,
2000,  compared to 54% for the fiscal year ended July 31, 1999.  The  percentage
decrease  was  due  to  the  Company's  ability  to cut  costs,  streamline  its
operations,  and  eliminate  inefficient  and  duplicative  processes.  Clinical
expenses for the fiscal year ended July 31, 2000, were $19,494,000, representing
an increase of 12% over clinical  expenses of  $17,406,000  for the prior fiscal
year. This increase was primarily due to clinical  expenses  associated with the
16 additional  centers that were acquired by the Company  during the fiscal year
ended  July 31,  2000.  Clinical  expenses  include  all  personnel,  marketing,
occupancy and other operating expenses at the center level.

      Provision for Doubtful Accounts. During the fourth quarter of fiscal 2000,
the  Company  incurred a charge of  $2,300,000  to  increase  its  reserves  for
accounts  receivable.  The Company  determined  that an increase in reserves was
necessary  because of a deterioration of accounts  receivable  caused by certain
events that took place in the fourth  quarter of fiscal 2000.  During the fourth
quarter of fiscal 2000, the Company received  correspondence  from a significant
third-party customer stating that a majority of a sample of the Company's claims
examined by the customer were ones for which the original  claim  submission was
not received or the claims were denied and no evidence of timely  follow-up  was
demonstrated. Although the Company believed that the customer's conclusions were
incorrect  regarding many of these claims, it concluded that certain receivables
aggregating  approximately  $544,000  were  at  substantially  greater  risk  of
non-payment and that the prudent course of action was to establish a reserve for
these receivables.  In addition, the Company discontinued its normal billing and
collections  cycle  related to new  business  in the fourth  quarter in order to
attempt to meet an obligation under a financing  agreement to collect a specific
portion of its aged  receivables  by July 31, 2000. The entire billing staff was
dedicated exclusively to this project during May 2000 (and a substantial portion
of the staff was dedicated to this project in June and July 2000).



                                       20
<PAGE>


As a result,  net accounts  receivable  (before the $2,300,000 charge) increased
$2,400,000  during the fourth quarter compared to $2,700,000 for the prior three
quarters  combined.  The Company's  diminished  focus on current business in the
fourth quarter caused substantial deterioration in its accounts receivable aging
and reduced the  collectibility  of the fourth quarter  business.  The financing
agreement  obligation ended on July 31, 2000, at which time the Company returned
to its normal billing cycle after determining that  concentrating its efforts on
collecting  receivables that were more current would yield greater benefits. The
Company  therefore  determined  that an addition  to the  reserve  for  doubtful
accounts as of July 31, 2000, was necessary  because it was likely that a higher
proportion of the receivables outstanding at that date would not be collected.

      General and  Administrative  Expenses.  As a percentage  of net  revenues,
general and  administrative  expenses decreased to 20% for the fiscal year ended
July 31,  2000,  versus 22% for the same period in the prior  fiscal  year.  The
decrease in general and administrative  expenses as a percentage of revenues was
due to  growth  in the  Company's  revenue  base as a  result  of its  strategic
acquisition program and enhanced marketing efforts, as well as continued efforts
to decrease  administrative costs. General and administrative expenses in dollar
terms  increased 16% from $7,583,000 for the fiscal year ended July 31, 1999, to
$8,778,000  for the fiscal year ended July 31,  2000.  The  increase  was due to
increased  personnel costs and other corporate  expenses related to building the
appropriate infrastructure to support the growth of the Company.

      Depreciation  and  Amortization  Expense.  Depreciation  and  amortization
expense for the fiscal year ended July 31, 2000, was $3,109,000,  an increase of
27% over the $2,450,000 in depreciation and  amortization  expense for the prior
fiscal  year.  The  increase  resulted  from the  depreciation  of property  and
equipment and  amortization of goodwill and covenants not to compete  associated
with the 16 additional  centers  acquired by the Company  during the fiscal year
ended July 31, 2000.

      Other Income and Expense.  Interest  income for the fiscal year ended July
31, 2000, was $260,000 compared to $261,000 for the prior fiscal year.  Interest
expense  for the fiscal  year ended July 31,  2000,  was  $342,000  compared  to
$300,000  for the fiscal year ended July 31,  1999,  an increase of 14%,  due to
higher balances of long-term debt incurred in connection with  acquisitions  and
capital expenditures.

LIQUIDITY AND CASH RESERVES

      For the fiscal year ended July 31,  2001,  net cash  provided by operating
activities was  $3,005,000  compared to a net use of $2,051,000 for fiscal 2000.
Net cash provided by operating  activities  for fiscal 2001  resulted  primarily
from increases in accounts payable, other accrued liabilities, deferred revenue,
and  accrued   payroll  of  $3,189,000,   $445,000,   $157,000,   and  $248,000,
respectively,  a decrease in accounts receivable of $722,000,  and the Company's
provision  for doubtful  accounts,  provision  for  slow-moving  inventory,  and
depreciation  and  amortization  expense of $851,000,  $78,000,  and $3,921,000,
respectively.  This was  offset  by the  Company's  net loss of  $7,359,000  and
increases  in other  receivables,  inventory,  and prepaid  expenses of $894,000
$202,000, and $267,000,  respectively.  For the fiscal year ended July 31, 2000,
net cash used in operating activities was $2,051,000. Net cash used in operating
activities  for fiscal 2000  resulted  primarily  from the Company's net loss of
$3,101,000  and  increases  in  accounts  receivable,   other  receivables,  and
inventory of  $4,971,000,  $1,141,000,  and  $447,000,  respectively,  offset by
increases in accounts  payable and accrued  payroll of $1,431,000  and $246,000,
respectively,  and the Company's  provision for doubtful  accounts of $2,691,000
and depreciation and amortization of $3,109,000.

      Net cash used in  investing  activities  was  $5,841,000  for fiscal 2001,
resulting  primarily from the investment of restricted  acquisition  funds,  the
purchase of property and equipment,  and net cash paid for business acquisitions
of  $4,885,000,  $568,000 and $177,000,  respectively.  In fiscal 2000 investing
activities used net cash of $3,706,000,  consisting primarily of the purchase of
property and equipment of $3,305,000 and net cash paid for business acquisitions
of $438,000.

   On May 31, 2001, Sonus-USA entered into a seven-year credit agreement (the
"Credit Agreement") with an affiliate of one of the



                                       21
<PAGE>


      Company's  major  hearing  instrument  suppliers.   The  Credit  Agreement
provides  for the  Company  to  borrow  up to  $20,000,000  for the  purpose  of
acquiring  independent  hearing  clinics.  The Credit  Agreement also allows the
Company to borrow up to the greater of $50,000 or 20% of the  purchase  price of
an acquisition for the purpose of paying fees,  costs,  and expenses  related to
the acquisition.  Borrowings may be made until May 31, 2006. Interest is payable
quarterly. No repayments of principal are required during the first two years of
the credit  agreement  ending May 31, 2003.  As of July 31, 2001 the Company had
$5,000,000  outstanding under the Credit  Agreement.  All loans bear interest at
6%.  Sonus-USA has pledged as security for borrowings under the Credit Agreement
all accounts,  inventory,  general intangibles,  chattel paper, and interests in
subsidiaries  formed to hold assets  acquired  with the  proceeds of  borrowings
("Acquisition  Subsidiaries").  In addition, such Acquisition  Subsidiaries have
pledged as security all inventory, general intangibles,  documents, instruments,
equipment,  investment  property,  collateral  accounts,  and books and  records
(including customer lists) acquired with the proceeds of borrowings. At July 31,
2001, the Company was in violation of leverage  ratio and fixed charge  coverage
ratio covenants under the Credit Agreement.  The Credit Agreement was amended on
November 19, 2001, to bring the Company into compliance with such covenants, but
there can be no assurance that the Company will meet the covenants of the Credit
Agreement in the future.  As a result,  the amount  outstanding under the Credit
Agreement is classified as short-term.

      Concurrent with the execution of the Credit Agreement, the Company entered
into  a  seven-year  sales  agreement  with  the  hearing  instrument  supplier.
Beginning  with the period from October 1, 2001 to December  31,  2001,  and for
each  calendar  year  thereafter,  the Company is required to purchase a minimum
number  of  hearing  instruments  from the  supplier.  If the  minimum  purchase
requirement  is not met in any period,  the Company is required to refund to the
supplier  a  portion  of the  discounted  sales  price  of  hearing  instruments
purchased by the Company during such period.

      In  July  2000,  the  Company,  through  its  subsidiaries  Sonus-USA  and
Sonus-Texas, entered into a revolving line of credit agreement with a commercial
bank.  The line of credit,  which is primarily  secured by accounts  receivable,
matures on December 3, 2001,  and bears  interest at the bank's  prime rate plus
0.5%. As of July 31, 2001,  the Company had borrowed  $600,000 under the line of
credit.  The Company was in violation of certain  financial  covenants under the
line of credit as of July 31, 2001,  relating to its net worth,  current  ratio,
and earnings  before  interest,  taxes,  depreciation,  and  amortization.  As a
result, the unpaid balance of $600,000 was immediately due and payable. However,
the bank has waived  compliance  with such covenants and has agreed to allow the
Company to repay the  outstanding  balance  after  maturity by making an initial
payment of  $150,000 on December 3, 2001,  and  subsequent  monthly  payments of
$100,000 until the amount owing has been paid in full.

      During fiscal year 2001, the Company  received  advances of long-term debt
and capital lease  obligations  of $5,287,000,  which were  partially  offset by
repayments of  $2,372,000.  As a result of the foregoing,  financing  activities
provided net cash of $3,384,000 in fiscal 2001.

      Financing  activities  provided  net cash of  $6,038,000  in fiscal  2000,
primarily as a result of the issuance of preferred stock in October 1999 for net
proceeds of $9,860,000, offset by repayments of long-term debt and capital lease
obligations  of $3,237,000  and  repayments of bank loans and  short-term  notes
payable of $500,000.

      The terms of certain of the Company's  acquisition  agreements provide for
additional consideration to be paid if the acquired entity's revenues or results
of operations  exceed certain target levels.  Such additional  consideration  is
paid in cash and is  recorded  when earned as  additional  purchase  price.  The
maximum amount of contingent  consideration  that the Company may be required to
pay is $421,000 for the year ended July 31, 2002 and $246,000 thereafter.

      The  Company's  ability to generate net cash from  operations  will depend
heavily on its  ability  to collect  existing  accounts  receivable  in a timely
manner.  Notwithstanding this, the Company believes that its cash and short-term
investments  and cash generated from  operations  will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures through July
31, 2002.  The Company also believes that it can reduce  expenditures  or obtain
support  from  its  major  shareholder  to  improve  short-term  cash  flow.  If
necessary,  the Company  may seek

                                       22
<PAGE>


additional funding to support the Company's  operating  strategy.  These funding
requirements  may  result in the  Company  incurring  long-term  and  short-term
indebtedness  and in the  public or  private  issuance,  from  time to time,  of
additional  equity  or debt  securities.  Any such  issuance  of  equity  may be
dilutive  to current  shareholders  and debt  financing  may impose  significant
restrictive  covenants on the Company.  There can be no assurance  that any such
financing  will be  available  to the  Company  or will be  available  on  terms
acceptable to the Company.

ACCOUNTING PRONOUNCEMENTS

      In June 2001,  Statement of Financial  Accounting  Standards  ("SFAS") No.
141,  "Business  Combinations"  ("SFAS No. 141") and SFAS No. 142  "Goodwill and
Other  Intangible  Assets"  ("SFAS  No.  142")  were  issued  by  the  Financial
Accounting  Standards  Board  ("FASB").  Under SFAS No. 141,  only the  purchase
method of accounting is permitted for business combinations initiated after June
30, 2001. Under SFAS No. 142,  goodwill and indefinite  lived intangible  assets
are no longer  amortized  but are reviewed  annually for  impairment.  Separable
intangible  assets that are not deemed to have an indefinite  life will continue
to be amortized over their useful lives. The amortization provisions of SFAS No.
142 apply to goodwill and intangible  assets  acquired after June 30, 2001. With
respect to goodwill and  intangible  assets  acquired prior to July 1, 2001, the
Company  will apply the new  accounting  rules  beginning  August 1,  2002.  The
Company is currently  assessing the financial  impact that SFAS No. 141 and SFAS
No. 142 will have on its consolidated financial statements.  With respect to the
adoption of SFAS No.  142,  the Company  anticipates  that all of the  Company's
goodwill will no longer be amortized.  In addition, a goodwill impairment charge
may be  required  under  SFAS  No.  142's  new  impairment  guidance.  Any  such
impairment  charge may impact the  Company's  compliance  with its various  debt
covenants.

      In August 2001,  No. 144,  "Accounting  for the  Impairment or Disposal of
Long-Lived  Assets"  ("SFAS  No.  144") was  issued by the  FASB.  SFAS No.  144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), and provides a single
accounting  model for long-lived  assets to be disposed of.  Although  retaining
many of the fundamental  recognition and measurement provisions of SFAS No. 121,
SFAS No. 144  significantly  changes the  criteria  that would have to be met to
classify an asset as held-for-sale.  SFAS No. 144 also supersedes the provisions
of  Accounting  Principle  Board  Opinion  No.  30,  "Reporting  the  Results of
Operations--Reporting  the Effects of  Disposal of a Segment of a Business,  and
Extraordinary,  Unusual and Infrequently Occurring Events and Transactions" with
regard to  reporting  the effects of a disposal  of a segment of a business  and
will require expected future operating losses from discontinued operations to be
displayed in  discontinued  operations  in the period(s) in which the losses are
incurred.   In  addition,   more  dispositions  will  qualify  for  discontinued
operations treatment in the statement of operations.  The provisions of SFAS No.
144 are to be  applied  prospectively  and  will be  effective  for the  Company
beginning  August 1, 2002.  The Company is  currently  assessing  the  financial
impact that SFAS No. 144 will have on its consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      As of July 31, 2001 and 2000,  the  Company had cash and cash  equivalents
and short-term  investments  (including  restricted amounts) totaling $6,193,000
and  $788,000,  respectively.  The Company has  assessed  its  vulnerability  to
certain  market  risks,   including  interest  risk  associated  with  financial
instruments  included in cash,  cash  equivalents,  and short-term  investments.
Declines in  interest  rates over time will  reduce  interest  income from these
financial  instruments,  but the Company  believes that its exposure to interest
rate changes has and will be immaterial  due to the  short-term  nature of these
financial  instruments.  At July 31,  2001 and 2000,  the  Company  had debt and
capital lease  obligations that total  $7,542,000 and $3,724,000,  respectively.
Except for its bank loan, interest rates on the Company's debt and capital lease
obligations are fixed at the beginning of the repayment;  therefore, exposure to
changes in interest rates is limited to new financings. The interest rate of the
Company's bank loan fluctuates based on the prime rate of the lender, plus a set
incremental  interest  percentage above the prime rate. Due to the insignificant
amount of the Company's remaining obligations subject to variable interest rates
and the absence of  significant  adverse  fluctuations  in the prime  rate,  the
Company  believes that the exposure to interest rate changes is immaterial.  The
Company's  earnings and cash flow are subject to fluctuations  due to changes in
currency  rates  in  Canada.  Since  inception  however,  the  impact  of  these
fluctuations has been immaterial to the Company's earnings and cash flows.


                                       23
<PAGE>




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




THE BOARD OF DIRECTORS AND SHAREHOLDERS
SONUS CORP.


      We have audited the accompanying consolidated balance sheet of Sonus Corp.
as of July 31, 2001,  and the related  consolidated  statements  of  operations,
shareholders'  equity,  and cash flows for the year then  ended.  Our audit also
includes  the  financial  statement  schedule  for the year ended July 31,  2001
listed in the Index at Item 14 (a). These financial  statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit.

      We conducted our audit in accordance  with  auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sonus Corp. and
subsidiaries as of July 31, 2001, and the consolidated results of its operations
and its cash  flows for the year  then  ended,  in  conformity  with  accounting
principles  generally accepted in the United States.  Also, in our opinion,  the
related  financial  statement  schedule for the year ended July 31,  2001,  when
considered in relation to the 2001 basic consolidated financial statements taken
as a whole,  presents fairly in all material  respects the information set forth
therein.

      As discussed in Notes 1 and 8 to the  consolidated  financial  statements,
during  the year  ended  July 31,  2001,  Sonus  Corp.  changed  its  method  of
accounting for revenue  recognition and the method of accounting for convertible
securities with beneficial conversion features.

                                                           /s/ Ernst & Young LLP



Seattle,  Washington
November 9, 2001, except paragraph 2 of
Note 7, as to which the date is November 19, 2001

                                       24
<PAGE>



                    REPORT OF KPMG LLP, INDEPENDENT AUDITORS



THE BOARD OF DIRECTORS AND SHAREHOLDERS
SONUS CORP.


      We have audited the accompanying consolidated balance sheet of Sonus Corp.
and subsidiaries as of July 31, 2000, and the related consolidated statements of
operations,  shareholders'  equity,  and cash flows for each of the years in the
two-year period ended July 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

      We conducted our audits in accordance  with auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

      In our opinion,  the consolidated  financial  statements referred to above
present fairly, in all material respects,  the financial position of Sonus Corp.
and  subsidiaries  as of July 31, 2000,  and the  consolidated  results of their
operations,  and their cash flows for each of the years in the  two-year  period
ended July 31, 2000 in conformity with accounting  principles generally accepted
in the United States of America.


                                   /s/ KPMG LLP


Portland, Oregon
November 13, 2000
                                       25
<PAGE>

<TABLE>
<CAPTION>

                                   SONUS CORP.
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
                                                                         July 31,             July 31,
                                                                           2001                 2000
                                                                           ----                 ----
              ASSETS
<S>                                                                       <C>                   <C>
Current assets:
     Cash and cash equivalents                                            $ 1,317               $ 788
     Restricted cash and cash equivalents                                   3,870                 ---
     Restricted securities available for sale                               1,006                 ---
     Accounts receivable, net of allowance for doubtful
       accounts of $1,501 in 2001 and $3,691 in 2000                        4,797               6,359
     Inventory, net                                                         1,073                 952
     Prepaid expenses                                                         665                 396
     Other receivables                                                      2,419               1,497
                                                                            -----               -----
                                   Total current assets                    15,147               9,992

Property and equipment, net                                                 6,357               8,090
Goodwill, net                                                              17,419              18,121
Covenants not to compete, net                                               1,142               1,557
Other assets                                                                  234                  24
                                                                              ---                  --
                                                                         $ 40,299            $ 37,784
                                                                         ========            ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                    $  8,382             $ 5,200
     Customer deposits                                                        378                 441
     Bank loans                                                               600                 ---
     Accrued payroll                                                        1,889               1,643
     Other accrued liabilities                                              1,462               1,014
     Deferred revenues, current portion                                     1,763                 246
     Capital lease obligations, current portion                               261                 289
     Long-term debt, current portion                                        5,820               2,176
                                                                            -----               -----
                                   Total current liabilities               20,555              11,009


Deferred revenues, less current portion                                       854                 ---
Capital lease obligations, less current portion                               201                 181
Long-term debt, less current portion                                          660               1,078

Commitments and contingencies

Shareholders' equity:
     Series A convertible preferred stock, no par
          value per share, 2,666,666 shares authorized,
          issued, and outstanding (liquidation preference of $21,240)      15,701              15,701
     Series B convertible preferred stock, no par
          value per share, 2,500,000 shares authorized,
          issued, and outstanding (liquidation preference of $11,461)      15,661               8,306
     Common stock, no par value per share, unlimited
          number of shares authorized, 6,156,164 issued
          and outstanding (6,098,706 at July 31, 2000)                      9,095              16,470
     Notes receivable from shareholders                                      (168)                (93)
     Accumulated deficit                                                  (22,055)            (14,696)
     Accumulated other comprehensive loss                                    (205)               (172)
                                                                             ----                ----

                                   Total shareholders' equity              18,029              25,516
                                                                           ------              ------

                                                                         $ 40,299            $ 37,784
                                                                         ========            ========

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       26
<PAGE>

<TABLE>
<CAPTION>

                                  SONUS CORP.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)


                                                                Years ended July 31,
                                                          2001          2000        1999
                                                          ----          ----        ----
<S>                                                     <C>           <C>          <C>
Revenues:
     Product                                            $ 34,997      $ 37,252     $ 29,044
     Service                                               4,539         3,589        3,392
     Other                                                 9,398         3,118        1,323
                                                           -----         -----        -----
Net revenues                                              48,934        43,959       33,759

Costs and expenses:
     Cost of products sold                                 16,391       12,887       10,766
     Clinical expenses                                     19,904       19,494       17,406
     Provision for doubtful accounts                          851        2,691          389
     General and administrative expenses                   13,248        8,778        7,583
     Depreciation and amortization                          3,921        3,109        2,450
                                                            -----        -----        -----
Total costs and expenses                                   54,315       46,959       38,594
                                                           ------       ------       ------
Loss from operations                                       (5,381)      (3,000)      (4,835)

Other income (expense):
      Interest income                                         105          260          261
      Interest expense                                       (357)        (342)        (300)
      Other, net                                              388          (19)         (10)
                                                              ---          ---          ---
Loss before cumulative effect of change in
     accounting principle                                  (5,245)      (3,101)      (4,884)

Cumulative effect of change in accounting principle        (2,114)         ---          ---
                                                           ------       ------       ------
Net loss                                                   (7,359)      (3,101)      (4,884)

Deemed dividends to preferred shareholder                  (7,355)         ---          ---
                                                           ------       ------       ------
Net loss attributable to common shareholders            $ (14,714)    $ (3,101)    $ (4,884)
                                                        =========     ========     ========

Net loss per share of common stock (basic and diluted):

Loss per share before cumulative effect of change
      in accounting principle and deemed dividends to
      preferred shareholder                               $ (0.86)     $ (0.51)     $ (0.80)

Cumulative effect of change in accounting principle         (0.35)         ---          ---

Deemed dividends to preferred shareholder                   (1.20)         ---          ---
                                                          -------       -------     -------
Net loss attributable to common shareholders              $ (2.41)      $ (0.51)    $ (0.80)
                                                          =======       =======     =======

Weighted average shares outstanding                         6,111         6,083       6,090

Pro forma amounts, assuming the
     change in accounting principle was
     applied retroactively:

Net loss attributable to common shareholders            $ (12,600)     $ (3,952)   $ (6,147)

Net loss per common share (basic and diluted)             $ (2.06)      $ (0.65)    $ (1.01)


                        See accompanying notes to consolidated financial statements

</TABLE>


                                       27
<PAGE>



<TABLE>
<CAPTION>

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)

                                                     Preferred stock - Series A   Preferred stock - Series B     Common stock
                                                     --------------------------   --------------------------     ------------

                                                       Shares        Amount         Shares      Amount        Shares      Amount
                                                       ------        ------         ------      ------        ------      ------
<S>                                                    <C>         <C>             <C>          <C>        <C>          <C>
Balance at July 31, 1998                               2,666,666   $   15,701         --            --     6,079,908    $  14,615

  Net loss                                                  --           --           --            --           --            --
       Foreign currency translation adjustment              --           --           --            --           --            --
 Comprehensive loss                                         --           --           --            --           --            --

  Proceeds from exercise of warrants                        --           --           --            --        39,799          248
  Repurchase of common stock                                --           --           --            --       (10,680)         (90)
  Repayment on shareholder notes                            --           --           --            --           --           --
  Payment of cash in lieu of fractional shares              --           --           --            --            (1)         --
  Stock options granted to non-employees                    --           --           --            --           --           203
                                                       ---------       ------       ------       ------    ---------       ------
Balance at July 31, 1999                               2,666,666       15,701         --            --     6,109,026       14,976
                --- ----                               ---------       ------       ------       ------    ---------       ------

  Net loss                                                  --           --           --            --           --           --
       Foreign currency translation adjustment              --           --           --            --           --           --


  Issuance of Series B convertible preferred stock          --           --       2,500,000       9,860           --          --

 Amendment of terms of common stock warrants
      related to issuance of Series B convertible
      preferred stock                                       --           --           --         (1,554)          --        1,554

  Repurchase of common stock                                --           --           --            --       (10,320)         (86)
  Stock options granted to non-employees                    --           --           --            --           --            26
                                                       ---------       ------     ---------       -----    ---------       ------
Balance at July 31, 2000                               2,666,666       15,701     2,500,000       8,306    6,098,706       16,470
                                                       ---------       ------       ------       ------    ---------       ------

  Net loss                                                  --           --           --            --         --              --
       Foreign currency translation adjustment              --           --           --            --         --              --
       Unrealized loss on securities
        available for sale                                  --           --           --            --         --              --


  Repurchase of common stock                                --           --           --            --       (9,000)          (75)

  Issuance of common stock in connection
     with acquisition                                       --           --           --            --        6,458            16

   Issuance of common stock upon exercise
      of stock options                                      --           --           --            --       60,000            75

 Stock options granted to non-employees                     --           --           --            --          --            (36)

 Deemed dividends to preferred shareholder                  --           --           --          7,355         --         (7,355)
                                                       ---------   ----------     ---------   ---------    ---------       ------
 Balance at July 31, 2001                              2,666,666   $   15,701     2,500,000   $  15,661    6,156,164        9,095
                                                       =========   ==========     =========   =========    =========       ======
</TABLE>

<TABLE>
<CAPTION>

                                                        Shareholder                                                      Total
                                                           notes     Accumulated  Accumulated other  Comprehensive     Shareholders'
                                                        receivable     deficit    comprehensive loss   income (loss)     Equity
                                                        ----------     -------    ------------------   -------------     ------

<S>                                                 <C>           <C>                  <C>              <C>           <C>
Balance at July 31, 1998                             $      (283)  $    (6,711)         $    (229)                    $   23,093

  Net loss                                                    --        (4,884)                --      $    (4,884)       (4,884)
       Foreign currency translation adjustment                --          --                   55               55            55
                                                                                                        ----------
 Comprehensive loss                                           --          --                   --      $    (4,829)           --
                                                                                                        ==========

  Proceeds from exercise of warrants                          --          --                   --                            248
  Repurchase of common stock                                  --          --                   --                            (90)
  Repayment on shareholder notes                             190          --                   --                            190
  Payment of cash in lieu of fractional shares                --          --                   --                             --
  Stock options granted to non-employees                      --          --                   --                            203
                                                           -----       -------               ----                         -------
Balance at July 31, 1999                                     (93)      (11,595)              (174)                        18,815
                                                           -----       -------               ----                         -------
  Net loss                                                    --        (3,101)                --      $    (3,101)       (3,101)
       Foreign currency translation adjustment                --            --                  2                2             2
                                                                                                        ----------
                                                                                                       $    (3,099)
                                                                                                        ==========

  Issuance of Series B convertible preferred stock            --            --                 --                          9,860

 Amendment of terms of common stock warrants
      related to issuance of Series B convertible
      preferred stock                                         --            --                 --                             --

  Repurchase of common stock                                  --            --                 --                            (86)
  Stock options granted to non-employees                      --            --                 --                             26
                                                           -----       -------               ----                         -------
Balance at July 31, 2000                                     (93)      (14,696)              (172)                        25,516
                                                           -----       -------               ----                         -------

  Net loss                                                    --        (7,359)                        $    (7,359)       (7,359)
       Foreign currency translation adjustment                --            --                (24)             (24)          (24)
        Unrealized loss on securities
        available for sale                                    --            --                 (9)              (9)           (9)
                                                                                                        ----------
                                                                                                       $    (7,392)
                                                                                                        ==========

  Repurchase of common stock                                  --            --                 --                            (75)

  Issuance of common stock in connection
     with acquisition                                         --            --                 --                             16

   Issuance of common stock upon exercise
      of stock options                                       (75)           --                 --                             --

 Stock options granted to non-employees                       --            --                 --                            (36)

 Deemed dividends to preferred shareholder                    --            --                 --                             --
                                                        --------    ----------        -----------                       --------
 Balance at July 31, 2001                               $   (168)   $  (22,055)       $      (205)                      $ 18,029
                                                        ========    ==========        ===========                       ========


</TABLE>

                                       28
<PAGE>


<TABLE>
<CAPTION>
                                  SONUS CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

                                                                                   Years ended July 31,
                                                                              2001          2000       1999
                                                                              ----          ----       ----

<S>                                                                        <C>           <C>         <C>
Cash flows from operating activities:
     Net loss                                                              $ (7,359)     $ (3,101)   $ (4,884)
     Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
          Impairment of goodwill                                                 55           ---         ---
          Provision for doubtful accounts                                       851         2,691         389
          Provision for slow-moving inventory                                    78           ---         ---
          Depreciation and amortization                                       3,921         3,109       2,450
          Compensation cost for options granted to non-employees                 10            26         203
          Deferred revenue                                                      157           420         ---
          Cumulative effect of change in accounting principle                 2,114           ---         ---
          Changes in operating assets and liabilities:
               Accounts receivable                                              722        (4,971)       (554)
               Other receivables                                               (894)       (1,141)        172
               Inventory                                                       (202)         (447)        560
               Prepaid expenses                                                (267)          (56)        (59)
               Accounts payable                                               3,189         1,431         557
               Customer deposits                                                (63)         (130)         50
               Accrued payroll                                                  248           246         113
               Other accrued liabilities                                        445          (128)     (1,278)
                                                                              -----        ------      ------
                    Net cash provided by (used in) operating activities       3,005        (2,051)     (2,281)
                                                                              -----        ------      ------

Cash flows from investing activities:
     Investment in restricted acquisition funds                              (4,885)          ---         ---
     Sale of short-term investments                                             ---           ---       6,408
     Purchase of property and equipment                                        (568)       (3,305)     (3,368)
     Additional costs related to acquisitions                                  (211)          ---        (188)
     Deferred acquisition costs and other, net                                  ---            37          88
     Net cash paid for business acquisitions                                   (177)         (438)     (2,062)
                                                                             ------        ------      ------
               Net cash provided by (used in) investing activities           (5,841)       (3,706)        878
                                                                             ------        ------      ------

Cash flows from financing activities:
    Advances of long-term debt and capital lease obligations                  5,287             1         330
    Repayments of long-term debt and capital lease obligations               (2,372)       (3,237)     (1,956)
    Deferred financing costs, net                                               (10)          ---           3
    Advances of bank loans and short-term notes payable                         600           ---         500
    Repayments of bank loans and short-term notes payable                       ---          (500)        (46)
    Repayments from (advances to) shareholders                                  (75)          ---         190
    Issuance of common stock, net of costs                                       29           ---         248
    Issuance of preferred stock, net of costs                                   ---         9,860         ---
    Repurchase of common stock                                                  (75)          (86)        (90)
                                                                                ---           ---         ---
               Net cash provided by (used in) financing activities            3,384         6,038        (821)
                                                                              -----         -----       -----

Net increase (decrease) in cash and cash equivalents                            548           281      (2,224)
Effect on cash and cash equivalents of changes in foreign translation rate      (19)            9           2
Cash and cash equivalents, beginning of period                                  788           498       2,720
                                                                            -------         -----       -----
Cash and cash equivalents, end of period                                    $ 1,317         $ 788       $ 498
                                                                            =======         =====       =====
Supplemental disclosures:
     Interest paid during the period                                          $ 352         $ 353       $ 218
     Non-cash investing and financing activities:
       Issuance and assumption of long-term debt in acquisitions                393           573       2,611
       Issuance of common stock on exercise of options
       through shareholder loan                                                  75           ---         ---
       Issuance of common stock upon conversion of convertible note             ---           ---         650
       Issuance of common stock in acquisitions                                  16           ---         ---
       Deemed dividends to preferred shareholder                              7,355           ---         ---
       Acquisition of clinical and computer equipment with capital
       lease obligations                                                        282           566         ---
       Notes receivable created from business sale                              218           ---         ---

          See accompanying notes to consolidated financial statements.
</TABLE>
                                       29
<PAGE>





                                   SONUS CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JULY 31, 2001 AND 2000

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Description of Company

      Sonus  Corp.,  a Yukon  Territory,  Canada  corporation  (the  "Company"),
through  its  primary  operating  subsidiaries,  Sonus-Canada  Ltd.,  a  British
Columbia,  Canada  corporation,   Sonus-USA,  Inc.,  a  Washington  corporation,
Sonus-Texas, Inc., an Oregon corporation, and Sonus Acquisition Corp., an Oregon
corporation, owns and operates 104 hearing care centers in the United States and
Western  Canada.  The centers are located in the states of Arizona,  California,
Illinois,  Michigan, Missouri, New Mexico, Oregon, Texas, and Washington, and in
the Canadian  provinces of British  Columbia and Alberta.  Each of the Company's
hearing care centers provides its hearing  impaired  customers with a full range
of  audiological  products and  services.  The Company  also  operates a network
licensing program, The Sonus Network, with over 900 current locations. Licensees
are entitled to use the Sonus name and receive  other  benefits such as practice
management advice and training,  group buying discounts, and marketing services.
The Company,  through its subsidiary  Hear PO Corp.,  a New Mexico  corporation,
obtains  contracts to provide  hearing care  benefits to managed care groups and
corporate health care organizations  through its approximately  1,400 affiliated
hearing centers and sells Hear PO brand private label hearing instruments.

   Principles of Consolidation

      The consolidated  financial  statements include the Company's wholly owned
subsidiaries. All significant inter-company accounts have been eliminated.

   Revenue Recognition

      The  Company  recognizes  revenue  from  the  sale of  hearing  instrument
products, diagnostic hearing services, and other sources as follows:

Products:  Revenue from the sale of hearing instrument products is recognized at
the time of delivery of the hearing  instrument  product and  acceptance  by the
patient.  Amounts  received  in  advance of the  delivery  of the  products  are
recorded as customer deposits.

Services:  Revenue from  diagnostic  hearing care  services is recognized at the
date the service is performed.  Under certain product sales the patients receive
the right to future hearing care and diagnostic services and free batteries. The
Company defers revenue  related to these  obligations  based on their fair value
and recognizes such revenue over one to three years,  the period the obligations
are  discharged.  Any discount  associated  with the bundled product and service
arrangements is allocated to products.

The Company acts as a third party  administrator and submits claims on behalf of
service  providers  to  the  insurance  carriers.   Revenue  from  administering
providers'  claims is  recognized  when claims are received  from the  insurance
carrier and repaid to the providers.

Other:  Revenue related to revenue sharing arrangements with respect to supplier
sales to  members  of The Sonus  Network  is  recognized  when  earned.  Hearing
instruments  sold by the Company are covered by  manufacturers'  warranties.  In
addition,  the Company  sells  extended  manufacturer  warranties on the hearing
instruments to patients.  Extended  warranty  revenue is deferred and recognized
over the one-year term of the warranties.

   The Company estimates the necessary contractual allowances in the period
hearing instrument products are sold



                                       30
<PAGE>


and diagnostic hearing services are provided to reduce gross product and service
revenue to the estimated net realizable  amounts due from  patients,  commercial
insurance  carriers,  and  government  agencies.  Gross product  revenue is also
reduced  by a  provision  for  estimated  sales  returns  at the time of sale as
customers  may return  hearing  instrument  products to the Company and obtain a
full  refund  up to 60 days (75  days  for  certain  models)  after  the date of
purchase.  In general,  the Company can return hearing  instruments  returned by
customers  within the return period  allowed by the Company to the  manufacturer
for a full  refund.  Due to the use of  estimates  in  establishing  contractual
allowances  and the  sales  returns  reserve  there  is at  least  a  reasonable
possibility that the recorded estimates for contractual allowances and the sales
returns  reserve  will  change  by a  material  amount in the near  future.  The
contractual allowances and sales returns reserve are adjusted in future periods,
as final settlements with third parties are determined.

      During the fourth  quarter of the year ended July 31,  2001,  the  Company
changed  its method of  accounting  retroactively  to August 1,  2000.  Based on
guidance provided in Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), the
Company  concluded that when a sale of a hearing  instrument is coupled with the
performance  of future  services  or  obligations  for free  batteries,  revenue
related to the fair value of the  obligations  should be deferred and recognized
as revenue as the  obligations are discharged.  The Company's  previous  revenue
recognition  policy  was to  recognize  all  revenue  on  the  sale  of  hearing
instruments,  including post-sales services,  at the time the hearing instrument
was  delivered  and to accrue  the cost of  estimated  battery  replacement.  In
accordance  with SAB 101, the Company  recorded a non-cash  charge of $2,114,000
(or $0.35 per share,  basic and diluted) to reflect the cumulative effect of the
change as of August 1, 2000.  Revenue of $1,313,000  included in the  cumulative
effect was  recognized as revenue in the year ended July 31, 2001.  For the year
ended July 31, 2001,  the increase to net loss before the  cumulative  effect of
the change in  accounting  principle  as a result of the adoption of SAB 101 was
$6,000.   The  pro  forma  amounts  shown  on  the  consolidated  statements  of
operations  are  presented  as if the new  revenue  recognition  policy had been
applied retroactively for all periods presented.

   Income Taxes

      The Company accounts for income taxes under Financial Accounting Standards
Board ("FASB")  Statement of Financial  Accounting  Standards  ("SFAS") No. 109,
"Accounting  for Income  Taxes." SFAS No. 109 requires the use of the  liability
method in determining  income tax expense.  Deferred tax assets and  liabilities
are  recognized  for the future tax  consequences  attributable  to  differences
between  the  financial  statement  carrying  amounts  of  existing  assets  and
liabilities  and their  respective  tax bases and operating  loss and tax credit
carryforwards.  A valuation  allowance is  established  when necessary to reduce
deferred tax assets to the amount expected to be realized.

   Cash and Cash Equivalents and Restricted Cash

      Cash  equivalents  consist of short-term,  highly liquid  investments with
original  maturities of 90 days or less. At July 31, 2001, the use of $3,870,000
of cash and cash  equivalents  was  restricted  to  acquisition  of hearing care
practices  under the terms of a credit  agreement.  See Note 7, Lines of Credit.
The Company had no restricted cash and cash equivalents at July 31, 2000.

                                       31
<PAGE>



   Restricted Securities Available for Sale

      Securities available for sale are stated at fair value. Unrealized holding
gains  and  losses  are  reflected  as  a  net  amount  in   accumulated   other
comprehensive loss until realized.  At July 31, 2001,  unrealized holding losses
of the Company's  available-for-sale  securities were $9,000.  At July 31, 2000,
the Company had no short-term  investments.  Gross  realized gains and losses on
sales of available-for-sale  securities for the years ended July 31, 2001, 2000,
and 1999 were  nominal.  Realized  gains and losses are computed by  determining
cost on a  specific  identification  basis.  At July  31,  2001,  the  Company's
restricted securities  available-for-sale  consisted of a commercial medium term
note in the amount of  $1,006,000  with a  contractual  maturity date of October
2001,  the use of which  was  restricted  to the  acquisition  of  hearing  care
practices under the terms of a credit agreement. See Note 7, Lines of Credit.

      Gross proceeds from sales and maturities of available-for-sale investments
during the years ended July 31, 2001, 2000, and 1999 were $0,  $11,001,000,  and
$6,408,000, respectively.

   Accounts Receivable

      The Company  establishes  the  allowance  for doubtful  accounts  based on
historical collections of accounts receivable and other factors. During the year
ended July 31, 2000, the Company  increased the allowance for doubtful  accounts
by $2,300,000 through a charge to income. The increase was considered  necessary
based on management's  review and assessment of the underlying detail supporting
receivables, information system issues, discontinuance of the normal billing and
collections  process  to meet a  financing  obligation  instead of  focusing  on
collecting  receivables,  and  changes in the  estimated  collectibility  of the
receivables at July 31, 2000.

   Inventory

      Inventory  primarily consists of hearing  instruments,  hearing instrument
batteries,  and assistive  listening  devices and is stated at the lower of cost
(first in, first out) or net  realizable  value.  Inventory at July 31, 2001, is
recorded net of a $78,000 reserve for slow-moving  inventory.  There was no such
reserve at July 31, 2000.

   Property and Equipment

      Property  and  equipment  are recorded at cost and  depreciated  using the
straight-line method over the following useful lives:

           Professional equipment                           Seven years
           Office equipment                                 Five years
           Computer equipment and software                  Five years

      Property and equipment  purchased under  capitalized  leases and leasehold
improvements are amortized over the shorter of the lease term or their estimated
useful  lives and such  amortization  is  included  with  depreciation  expense.
Depreciation  expense was $2,429,000,  $1,723,000,  and $1,255,000 for the years
ended July 31, 2001, 2000, and 1999, respectively.

                                       32

<PAGE>


   Advertising Expense

      The  Company  defers its  advertising  costs  until the  advertisement  is
actually released or the advertised event occurs, at which time the full expense
is recognized.  Deferred advertising costs were $251,000 and $60,000 at July 31,
2001 and 2000, respectively. Advertising expense was $5,708,000, $4,004,000, and
$3,632,000 for the years ended July 31, 2001, 2000, and 1999, respectively.

   Goodwill and Covenants Not to Compete

      The  unallocated  purchase costs in excess of the fair value of net assets
acquired  (goodwill)  is  amortized  on the  straight-line  basis over 20 years.
Goodwill as of July 31 was as follows (in thousands):

                                                 2001      2000
                                                 ----      ----

            Goodwill                         $  21,336  $ 20,970
            Less:  Accumulated amortization     (3,917)   (2,849)
                                                ------    ------
                                             $  17,419  $ 18,121
                                             =========  ========


      Costs allocated to non-compete agreements, based principally on underlying
contract  terms,  are  amortized  on the  straight-line  basis  over the  period
benefited of three to nine years. Covenants not to compete as of July 31 were as
follows:

                                                 2001      2000
                                                 ----      ----

            Covenants not to compete         $  2,274   $  2,311
            Less:  Accumulated amortization    (1,132)      (754)
                                                -----      -----
                                             $  1,142   $  1,557
                                                =====      =====

      Amortization  for  goodwill  and  covenants  not  to  compete  charged  to
operations was $1,492,000,  $1,386,000,  and $1,195,000 for the years ended July
31, 2001, 2000 and 1999, respectively.

   Impairment of Long-Lived Assets

      The Company assesses the  recoverability of long-lived  assets,  including
goodwill,  by determining  whether the carrying  amount of the long-lived  asset
over its remaining life can be recovered through  undiscounted  projected future
cash  flows.  If this  review  indicates  that  long-lived  assets  will  not be
recoverable,  the  carrying  amount of the  long-lived  assets is reduced by the
estimated   shortfall  of  cashflows.   The  evaluation   necessarily   involves
significant  management  judgment.

   Net Loss Per Share

      Basic  net  loss  per  share  is  computed  by  dividing  net  loss by the
weighted-average number of common shares outstanding for the period. Diluted net
loss per share reflects the dilutive effect of common stock equivalents, if any.
Other common stock equivalents,  including convertible preferred stock and notes
payable, stock options, and warrants, are excluded from the computation as their
effect is anti-dilutive.  The following common share equivalents,  as of the end
of each year  presented,  have been excluded from the computation of diluted net
loss per share for the years ended July 31,  2001,  2000,  and 1999  because the
effect would have been anti-dilutive:

                                       33
<PAGE>


                                                       Years Ended July 31,
                                                       --------------------
                                                      2001     2000     1999
                                                      ----     ----     ----
                                                          (in thousands)
Shares   issuable   under   stock   options  and
warrants.....................                         5,706     4,574   4,108
Shares  issuable upon  conversion of convertible
notes payable......                                     ---       ---     143
Shares of convertible  preferred  stock on an as
converted basis......                                 6,617     5,167   2,667

   Comprehensive Income (Loss)

      Comprehensive  income  (loss)  consists  of  net  income  (loss),  foreign
currency translation adjustment, and unrealized loss on securities available for
sale and is presented in the consolidated statement of shareholders' equity.

   Stock Based Compensation

      As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to continue to apply  Accounting  Principles  Board  Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees",  which prescribes an
intrinsic  value based method of accounting for stock plans  covering  employees
and to provide the pro forma  disclosures  of the effects of SFAS No. 123 on net
income (loss) and net income (loss) per share.

   Concentrations of Credit Risk

      Financial   instruments,   which   potentially   subject  the  Company  to
concentration of credit risk, consist  principally of cash and cash equivalents,
restricted cash, securities available for sale, and trade and other receivables.
The Company  places its cash with high credit  quality  institutions.  At times,
such  amounts  may be in excess of the  Federal  Deposit  Insurance  Corporation
insurance  limits.  Short-term  investments  are  maintained  in  highly  liquid
investments with short  contractual  terms to mitigate credit and market losses.
The  Company's  trade  accounts  receivable  are derived from  numerous  private
payors, insurance carriers, managed care organizations, and government agencies.
Concentration  of credit risk relating to trade  accounts  receivable is limited
due to the  diversity  and number of  customers  and payors.  Other  receivables
represent credits due from supply vendors.  Management believes the risk of loss
related to vendor  receivables is limited due to the financial  viability of the
vendors.  The Company  typically  requires  customers to provide a deposit for a
portion of the hearing instrument purchase price at the date of sale.

   Fair Value of Financial Instruments

      The  carrying  value  of  financial  instruments  such  as cash  and  cash
equivalents,   restricted  cash  and  cash   equivalents,   accounts  and  other
receivables,  accounts  payable,  and bank  loans  approximate  their fair value
because  of the  short-term  nature  of these  instruments.  The fair  values of
securities  available for sale are based on quoted market  prices.  The carrying
amounts  of  the  Company's   long-term  debt  and  capital  lease   obligations
approximates  fair value because the interest rates  approximate  the rates that
management believes are currently available to the Company.

   Accounting Pronouncements

      In June 2001, SFAS No. 141, "Business  Combinations"  ("SFAS No. 141") and
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued
by the FASB.  Under SFAS No. 141,  only the  purchase  method of  accounting  is
permitted for business  combinations  initiated after June 30, 2001.  Under SFAS
No. 142, goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment.  Separable  intangible assets that are
not deemed to have an indefinite  life will continue to be amortized  over their
useful lives. The amortization  provisions of SFAS No. 142 apply to goodwill and
intangible  assets  acquired  after


                                       34
<PAGE>

June 30, 2001. With respect to goodwill and intangible  assets acquired prior to
July 1, 2001, the Company will apply the new accounting  rules beginning  August
1, 2002. The Company is currently  assessing the financial  impact that SFAS No.
141 and SFAS No. 142 will have on its consolidated  financial  statements.  With
respect to the adoption of SFAS No. 142, the Company will no longer amortize its
recorded  goodwill.  In addition,  a goodwill  impairment charge may be required
under SFAS No. 142's new impairment  guidance.  Any such  impairment  charge may
impact the Company's compliance with its various debt covenants.

      In August 2001,  SFAS No. 144,  "Accounting for the Impairment or Disposal
of Long-Lived  Assets" was issued by the FASB.  SFAS No. 144 supersedes SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed Of" and provides a single  accounting model for long-lived
assets to be disposed of. Although retaining many of the fundamental recognition
and measurement  provisions of SFAS No. 121, SFAS No. 144 significantly  changes
the  criteria  that would have to be met to classify an asset as  held-for-sale.
SFAS No.  144 also  supersedes  the  provisions  of APB No. 30,  "Reporting  the
Results  of  Operations--Reporting  the  Effects of  Disposal  of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions" with regard to reporting the effects of a disposal of a segment of
a business and will require expected future  operating losses from  discontinued
operations to be displayed in discontinued operations in the period(s) which the
losses  are  incurred.   In  addition,   more   dispositions  will  qualify  for
discontinued operations treatment in the statement of operations. The provisions
of SFAS No. 144 are to be applied  prospectively  and will be effective  for the
Company  beginning  August 1, 2002.  The  Company  is  currently  assessing  the
financial  impact  that  SFAS No.  144 will have on its  consolidated  financial
statements.

   Use of Estimates

      The  preparation  of financial  statements in conformity  with  accounting
principles  generally accepted in the United States requires  management to make
estimates  and  assumptions  that affect the reported  amounts in the  financial
statements and accompanying notes.

   Reclassifications

      Certain amounts have been  reclassified  for the years ended July 31, 2000
and 1999 to conform to the presentation used for the year ended July 31, 2001.

NOTE 2.  OPERATIONAL MATTERS

      The Company's business has grown  significantly over the past three years.
Concurrent  with that  growth,  the  Company  has also  experienced  significant
problems with its information systems which, to a large extent, have resulted in
material bad debt expense or revenue adjustments that have contributed to losses
of $5,245,000 (before the cumulative effect of a change in accounting principle)
and $3,101,000 for the years ended July 31, 2001 and 2000, respectively. At July
31, 2001, the Company has an accumulated deficit of $22,055,000. In addition, at
July 31, 2001, the Company was in violation of certain  covenants under its line
of credit  agreements and has certain  commitments  and  contingencies  that may
adversely impact its cash flow and operating  results if settled  unfavorably to
the  Company.  See  Note 7,  Lines  of  Credit  and  Note  12,  Commitments  and
Contingencies.

      During the year ended July 31, 2001,  the Company  implemented a number of
operational  initiatives  designed  to  improve  profitability  and  cash  flow,
including hiring new senior  management,  increasing the number of reimbursement
employees,  limiting  expansion of Company-owned  hearing care centers,  rapidly
expanding  The Sonus  Network,  and  executing a new hearing  instrument  supply
contract and financing  arrangement with a key product  supplier.  The Company's
management  continues to focus on improving the Company's cash position  through
collection of accounts receivable,  enhancing information systems, and improving
operating profits at hearing centers.

      The Company's  ability to generate net


                                       35
<PAGE>

cash from  operations  will depend  heavily on its  ability to collect  existing
accounts  receivable  in a timely  manner.  Notwithstanding  this,  the  Company
believes  that its cash  and  short-term  investments  and cash  generated  from
operations  will be  sufficient to meet its  anticipated  cash needs for working
capital and  capital  expenditures  through  August 1, 2002.  The  Company  also
believes  that it can  reduce  expenditures  or  obtain  support  from its major
shareholder to improve short-term cash flow. If necessary,  the Company may seek
additional funding to support the Company's  operating  strategy.  These funding
requirements  may  result in the  Company  incurring  long-term  and  short-term
indebtedness  and in the  public or  private  issuance,  from  time to time,  of
additional  equity  or debt  securities.  Any such  issuance  of  equity  may be
dilutive  to current  shareholders  and debt  financing  may impose  significant
restrictive  covenants on the Company.  However,  no assurance can be given that
the Company will be  successful in achieving  continued  positive cash flow from
operations or that it will favorably settle its commitments and contingencies.

NOTE 3.  ACQUISITIONS

      During the fiscal year ended July 31,  2001,  the Company  acquired  eight
hearing  care  centers in eight  separate  transactions.  Each  transaction  was
accounted for as a purchase.  The acquired assets and liabilities  were recorded
at their estimated fair values at the date of  acquisition,  and the goodwill is
being amortized on a straight-line basis over 20 years. The operating results of
each acquisition have been included in the consolidated statements of operations
from the  respective  acquisition  date.  The aggregate  purchase  price for the
acquisitions consisted of cash payments of $177,000,  promissory notes issued by
the Company of $393,000  generally  payable over three years,  $16,000 in common
stock (6,458  shares),  and $12,000 in assumed  liabilities.  As a result of the
acquisitions,  the Company  recorded  approximately  $141,000  in  property  and
equipment,  $15,000 in other  assets,  $402,000  in  goodwill,  and  $40,000 for
covenants not to compete.

      During the year ended July 31, 2000, the Company  acquired 16 hearing care
centers in 10  transactions.  Each  transaction was accounted for as a purchase.
The acquired assets and liabilities were recorded at their estimated fair values
at  the  date  of  acquisition,  and  the  goodwill  is  being  amortized  on  a
straight-line  basis over 20 years.  The operating  results of each  acquisition
have  been  included  in the  consolidated  statements  of  operations  from the
respective  acquisition date. The aggregate  purchase price for the acquisitions
consisted of cash payments of $438,000,  promissory  notes issued by the Company
of  $521,000  generally  payable  over  three  years,  and  $85,000  in  assumed
liabilities. As a result of the acquisitions, the Company recorded approximately
$6,000 in  inventory,  $157,000  in  property  and  equipment,  $10,000 in other
assets, $795,000 in goodwill, which included costs related to acquisitions,  and
$85,000 for covenants not to compete.

      During  the fiscal  year ended July 31,  1999,  the  Company  acquired  31
hearing care centers in 17 transactions. Each transaction was accounted for as a
purchase.  The acquired assets and liabilities  were recorded at their estimated
fair values at the date of acquisition, and the goodwill is being amortized on a
straight  line basis over 20 years.  The operating  results of each  acquisition
have  been  included  in the  consolidated  statements  of  operations  from the
respective  acquisition date. The aggregate  purchase price for the acquisitions
consisted of cash payments of $1,704,000, promissory notes issued by the Company
of  $1,749,000  generally  payable  over three  years,  and  $900,000 in assumed
liabilities. As a result of the acquisitions, the Company recorded approximately
$95,000 in accounts receivable,  $90,000 in inventory,  $457,000 in property and
equipment,  $20,000 in other assets, and $3,700,000 in goodwill,  which included
costs  related  to  acquisitions.  In  addition  to the  purchase  price for the
acquisitions,  the Company also recorded  $299,000 for covenants not to compete,
of  which  $79,000  was paid in cash at the time of  closing,  with the  balance
payable over three years.

      The  following  unaudited  pro forma  financial  information  reflects the
historical  operations  of the Company and the hearing care centers  acquired by
the  Company  during  the  fiscal  years  ended  July 31,  2001  and  2000  (the
"Acquisitions") as if the acquisitions  occured at the beginning of each period.
Such financial  information has been prepared for comparative  purposes only and
is not necessarily  indicative of the Company's  combined  financial position or
the results of operations that actually would have occurred if the  Acquisitions
had been  consummated  on August 1, 1999. In addition,  such  information is not
intended to be a projection of results of operations that may be obtained by the
Company in the future.

                                       36
<PAGE>


                                             YEAR ENDED JULY 31,
                                             -------------------
                                                 (Unaudited)
          (in thousands,
         except per share amounts)             2001       2000
                                               ----       ----
         Net revenues                        $50,274    $50,040
         Loss before  cumulative  effect of
          change in accounting principle      (5,014)    (2,451)
         Net loss                             (7,128)    (2,451)
         Net loss  attributable  to common
          shareholders                       (14,483)    (2,451)

         Per   share   data   (basic   and
          diluted):
         Loss before  cumulative effect of
          change in accounting principle     (0.82)      (0.40)
         Net loss                            (1.17)      (0.40)
         Net loss  attributable  to common
          shareholders                       (2.37)      (0.40)


NOTE 4.  PROPERTY AND EQUIPMENT

      Property and equipment consist of the following as of July 31 (in
thousands):

                                           2001         2000
                                           ----         ----

             Professional equipment....  $2,816        $2,695
             Office equipment..........   1,200         1,155
             Leasehold improvements....   1,623         1,599
             Computer equipment and
              software.................   7,317         6,941
                                         ------        ------
                                         12,956        12,390
             Less accumulated
              depreciation and
              amortization.............  (6,599)       (4,300)
                                         ------        ------
                                         $6,357        $8,090
                                         ======        ======

NOTE 5.  CAPITAL LEASES

      The following is a schedule by year of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of July 31, 2001 (in thousands):

  2002...................................................... $301
  2003......................................................   63
  2004......................................................   60
  2005......................................................   58
  2006......................................................   57
                                                             ----
Total minimum lease payments                                  539
     Less:  amount representing interest....................  (77)
                                                             ----
     Present value of minimum lease payments................  462
     Less current portion................................... (261)
                                                             ----
                                                             $201
                                                             ====

Total assets under capitalized leases at July 31, 2001 and 2000, which consisted
primarily of professional and computer equipment, were $818,000 and $1,035,000.
Accumulated depreciation on the leased assets as of July 31, 2001 and 2000 was
approximately $316,000 and $573,000, respectively.


                                       37
<PAGE>


NOTE 6.  LONG-TERM DEBT

      Long-term debt consists of the following as of July 31 (in thousands):

                                                               2001        2000
                                                               ----        ----

      Acquisition line of credit from a supplier
       with an interest rate of 6% due 2008, secured by
       certain assets.  See Note 7, Lines of Credit          $5,000      $  ---

      Installment notes incurred in connection with
       acquisitions payable in monthly installments
       through 2003 with a weighted average interest
       rate of 7.0%, partially secured by purchased assets      129         292

      Installment notes incurred in connection with
       acquisitions payable in quarterly installments
       through 2004 with a weighted average interest rate
       of 6.8%, partially secured by purchased assets            90         249

      Installment notes incurred in connection with
       acquisitions payable in annual installments through
       2005 with a weighted average interest rate of 6.5%,
       partially secured by purchased assets                  1,115       1,733

      Non-interest bearing installment obligations for
       covenants not to compete through 2003 (net of
       discount of $10), partially secured by assets
       purchased in related acquisitions                         51         350

      Equipment loans from suppliers with interest rates
       from 7.8% to 18% per annum through 2003, secured
       by equipment                                              95         299

      Working capital loan from a supplier repaid in 2001       ---         331
                                                               ----       -----
                                                              6,480       3,254
       Less current portion                                  (5,820)     (2,176)
                                                               ----       -----
                                                            $   660     $ 1,078
                                                            =======     =======


Annual  maturities  of  long-term  debt are as follows  (in  thousands):  2002 -
$5,820; 2003 - $467; 2004 - $108;  2005 - $51; 2006 - $34.

NOTE 7.  LINES OF CREDIT

      In July  2000,  Sonus-USA,  Inc.  and  Sonus-Texas,  Inc.  entered  into a
$2,000,000  revolving line of credit  agreement with a commercial bank. The line
of credit  matures on December 3, 2001,  and bears  interest at the bank's prime
rate plus 0.5%,  or 7.25% at July 31, 2001.  The amount  available for borrowing
under the line of credit  was  $1,400,000.  The line of credit is secured by all
accounts  receivable,  inventory,  chattel  paper  and  general  intangibles  of
Sonus-USA, Inc. and Sonus-Texas, Inc. The line of credit requires the Company to
comply with certain financial and non-financial covenants. At July 31, 2001, the
Company was in violation of certain financial covenants under the line of credit
relating to its net worth,  current ratio, and earnings before interest,  taxes,
depreciation,  and amortization. As a result, the unpaid balance of $600,000 was
immediately due and payable.  However,  the bank has waived compliance with such
covenants and has agreed to allow the Company to repay the  outstanding  balance
after maturity by making an initial payment of $150,000 on December 3, 2001, and
subsequent  monthly payments of $100,000 until the amount owing has been paid in
full.

      On May 31, 2001,  Sonus-USA,  Inc.  entered into a credit  agreement  (the
"Credit  Agreement")  with an affiliate of one of the  Company's  major  hearing
instrument  suppliers.  The Credit  Agreement,  which has a term of seven years,
provides for borrowings up to $20,000,000  for the purpose of acquiring  hearing
care  practices.  Borrowings


                                       38
<PAGE>

bear  interest  at 6% and may be  made  until  May 31,  2006.  No  repayment  of
principal is required during the first two years of the Credit  Agreement ending
May 31, 2003,  after which  repayments  of principal  equal to 20% of the unpaid
principal amount existing as of the immediately  preceding May 31 are due during
each year ending May 31, 2004,  2005,  2006,  2007, and 2008, when the remaining
balance is due in full. As of July 31, 2001,  amounts  outstanding and available
under the  Credit  Agreement  were  $5,000,000  and  $15,000,000,  respectively.
Sonus-USA,  Inc.  has  pledged  as  security  for  borrowings  under the  Credit
Agreement all accounts,  inventory,  general  intangibles,  chattel  paper,  and
interests in  subsidiaries  formed to hold assets  acquired with the proceeds of
borrowings   ("Acquisition   Subsidiaries").   In  addition,   such  Acquisition
Subsidiaries  have  pledged as  security  all  inventory,  general  intangibles,
documents, instruments, equipment, investment property, collateral accounts, and
books and records  (including  customer  lists)  acquired  with the  proceeds of
borrowings.  The line of credit  requires  the  Company to comply  with  certain
financial  and  non-financial  covenants.  At July 31, 2001,  the Company was in
violation of leverage ratio and fixed charge  coverage ratio covenants under the
Credit Agreement.  As a result,  the entire  $5,000,000  balance was immediately
payable and is classified as short-term at July 31, 2001.  The Credit  Agreement
was amended on November 19, 2001, to bring the Company into compliance with such
covenants.  However,  there can be no  assurance  that the Company will meet the
covenants of the Credit  Agreement in the future.  See Note 12,  Commitments and
Contingencies.

NOTE 8.  SHAREHOLDERS' EQUITY

   Series A Convertible Preferred Shares

      The Company  has  2,666,666  Series A  Convertible  Preferred  Shares (the
"Series A Shares")  outstanding.  The following  summarizes certain terms of the
Series A Shares:

      Voting Rights.  Each Series A Share is entitled to one vote (or such other
number of votes  equal to the number of Common  Shares  into which such Series A
Share shall be  convertible  from time to time) in the election of directors and
any other  matters  presented to the  shareholders  of the Company for action or
consideration.

      Dividends.  Each Series A Share is entitled  to receive,  when,  as and if
declared by the board of  directors of the Company out of the  Company's  assets
legally  available for payment,  cumulative  dividends from the date of original
issuance,  payable  annually at a rate of 5% per annum on a base amount of $6.75
per share  (the  "Base  Amount").  As of July 31,  2001,  cumulative  undeclared
dividends  amounted to  $3,240,000.  All accrued  and unpaid  dividends  will be
forfeited  upon the  conversion  of the Series A Shares.  The  dividend  rate is
subject to increase on specified dates in the event that certain conditions (the
"Triggering  Conditions")  have not been met. The  Triggering  Conditions are as
follows:

      (a) The  Common  Shares are  listed on the New York  Stock  Exchange,  the
American Stock Exchange,  or the Nasdaq National Market (each a "U.S.  Principal
Market");

      (b) The Common  Shares are  traded on a U.S.  Principal  Market at a daily
closing price greater than $8.00 per Common Share on each of the ten consecutive
trading days preceding the applicable date; and

      (c) The Company's net income before income taxes,  dividends on the Series
A Shares,  and  amortization  of goodwill and  covenants  not to compete for the
three  consecutive  fiscal  quarters  preceding the  applicable  date shall have
averaged at least $0.22 per fully diluted  Common Share per fiscal  quarter (for
purposes  of making  this  calculation,  the  Common  Shares  issuable  upon the
exercise of warrants  issued in connection  with the Series A Shares will not be
counted).

   If the Triggering Conditions have not been met by:

      (1) January 1, 2003, the dividend rate will thereafter be 15% per annum of
the Base Amount;

                                       39
<PAGE>


      (2) January 1, 2004, the dividend rate will thereafter be 18% per annum of
the Base Amount; or

      (3) January 1, 2005, the dividend rate will thereafter be 21% per annum of
the Base Amount.

      As soon as the Triggering  Conditions  have been  satisfied,  the dividend
rate will revert to 5% per annum of the Base Amount.

      Liquidation  Preference.  In the  event of any  voluntary  or  involuntary
liquidation, dissolution, or winding up of the Company and subject to the rights
of holders  of any  securities  of the  Company  ranking  senior to the Series A
Shares  upon  liquidation,  the  holders of Series A Shares  will be entitled to
receive,  out of the  assets  of  the  Company  available  for  distribution  to
shareholders,  before  any  distribution  of assets is made to holders of Common
Shares or any  other  securities  ranking  junior  to the  Series A Shares  upon
liquidation, a liquidating distribution in an amount equal to the greater of (i)
$6.75 per share plus any  accrued and unpaid  dividends  or (ii) the amount that
would have been distributable to such holders if they had converted their Series
A Shares into Common Shares immediately prior to such dissolution,  liquidation,
or winding  up, plus any accrued  and unpaid  dividends.  The sale,  conveyance,
mortgage,  pledge or lease of all or substantially all the assets of the Company
will  be  deemed  to be a  liquidation  of  the  Company  for  purposes  of  the
liquidation rights of the holders of Series A Shares.  After payment of the full
amount of the liquidating  distribution to which they are entitled,  the holders
of  Series A Shares  will  have no right to any of the  remaining  assets of the
Company.

      Optional  Redemption.  The  Series A  Shares  may not be  redeemed  before
December 24, 2002. Thereafter, the Series A Shares may be redeemed at the option
of the  Company,  in whole or in part.  The  redemption  price will be an amount
equal to the  greater  of (i)  $6.75  per  share  plus any  accrued  and  unpaid
dividends or (ii) the fair market value of a Series A Share as  determined  by a
nationally  recognized  independent  investment  banking firm selected by mutual
agreement of the Company and the holder of a majority of the outstanding  Series
A Shares.  The Series A Shares are not subject to  mandatory  redemption  or any
sinking fund provisions.

      Conversion  Rights.  The Series A Shares may be converted at any time,  in
whole or in part, at the option of the holder thereof,  into Common Shares.  The
conversion  rate is  presently  equal to one Common Share for every one Series A
Share  surrendered  for  conversion.  The conversion  rate is subject to further
adjustment  for stock  dividends,  stock  splits,  recapitalizations,  and other
anti-dilution  adjustments.  Upon the  conversion  of any  Series A Shares,  any
accrued and unpaid dividends with respect to such shares will be forfeited.  The
Company has the right to force conversion of the Series A Shares, in whole or in
part, upon satisfaction of certain conditions.

   Series B Convertible Preferred Shares

      The Company  has  2,500,000  Series B  Convertible  Preferred  Shares (the
"Series B Shares")  outstanding.  The following  summarizes certain terms of the
Series B Shares:

      Voting  Rights.  Each  Series B Share is  entitled  to the number of votes
equal to the number of Common  Shares  into which such  Series B Share  shall be
convertible from time to time (1.5800854  Common Shares at July 31, 2001) in the
election of directors and any other matters presented to the shareholders of the
Company for action or consideration.

      Dividends.  Cash dividends will accrue on the Series B Shares at an annual
rate of 8% of the  conversion  price  then in effect  until  November  1,  2004,
increasing in steps thereafter to 18% beginning November 1, 2006,  provided that
the Company has met specified quarterly earnings targets. If the Company has not
met the  earnings  targets  by July 31,  2002,  dividends  will not accrue or be
payable  on the  Series B Shares.  As of July 31,  2001,  cumulative  undeclared
dividends  amounted to $1,461,000.  Upon conversion of the Series B Shares,  any
accumulated dividends will be forfeited.

      Liquidation  Preference.  In the  event of any  voluntary  or  involuntary
liquidation,  dissolution, or winding up of the Company subject to the rights of
holders of any  securities of the Company  ranking senior to the Series B Shares
upon  liquidation,  the  holders of Series B Shares will be entitled to receive,
out of the assets of the Company


                                       40
<PAGE>

available for distribution to shareholders, before any distribution of assets is
made to holders of Common Shares or any other  securities  ranking junior to the
Series B Shares upon liquidation,  a liquidating distribution in an amount equal
to the conversion  rate then in effect  multiplied by (i) the  conversion  price
then in effect  plus any accrued  and unpaid  dividends  or (ii) the amount that
would have been distributable to such holders if they had converted their Series
B Shares into Common Shares immediately prior to such dissolution,  liquidation,
or winding up, plus any accrued and unpaid dividends,  whichever is greater. The
sale,  conveyance,  mortgage,  pledge or lease of all or  substantially  all the
assets of the  Company  will be deemed to be a  liquidation  of the  Company for
purposes  of the  liquidation  rights of the  holders of Series B Shares.  After
payment of the full  amount of the  liquidating  distribution  to which they are
entitled,  the  holders  of  Series  B Shares  will  have no right to any of the
remaining assets of the Company. The Company will be prohibited from paying cash
dividends to holders of Common  Shares unless the  accumulated  dividends on the
Series B Shares have been paid in full.

      Optional  Redemption.  The  Series B  Shares  may not be  redeemed  before
October 1, 2004.  Thereafter,  the Series B Shares may be redeemed at the option
of the  Company,  in whole or in part.  The  redemption  price will be an amount
equal to the  conversion  rate then in effect  multiplied by (i) the  conversion
price then in effect  plus any  accrued  and unpaid  dividends  or (ii) the fair
market  value  of a  Series B Share as  determined  by a  nationally  recognized
independent  investment banking firm selected by mutual agreement of the Company
and the holder of a majority of the  outstanding  Series B Shares,  whichever is
greater.  The Series B Shares are not  subject to  mandatory  redemption  or any
sinking fund provisions.

      Conversion  Rights.  Until  October  31,  2000,  the Series B Shares  were
convertible  at the option of the holder on a one-for-one  basis into  2,500,000
Common Shares.  After October 31, 2000,  the  conversion  rate is required to be
adjusted  upward  each  fiscal  quarter  until  the  Company  attains  specified
quarterly earnings targets. The amount of such quarterly adjustments is based on
a  factor  of 2% of the  original  purchase  price  plus  the  sum of all  prior
adjustments  until  November 1, 2004,  increasing  in steps  thereafter  to 4.5%
beginning  November 1, 2006.  Once the Company  has met the  specified  earnings
targets for four  consecutive  fiscal  quarters,  no further  adjustments in the
conversion  rate will be made. The conversion rate is also subject to adjustment
for stock dividends, stock splits, recapitalizations,  and other similar events.
The Series B Shares are  subject to  mandatory  conversion  at the option of the
Company if certain share price and earnings targets are met. In addition, if the
Company failed to collect  certain  receivables by July 31, 2000, as required by
the terms of the Series B Shares, the conversion rate was subject to adjustment.

      The Emerging  Issues Task Force ("EITF") of the FASB in its consensus EITF
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently  Adjustable Conversion Ratios" ("EITF 98-5"),  provided guidance
regarding  the  accounting  for the  issuance  of  convertible  securities  with
non-detachable  conversion options and contingent conversion features. EITF 98-5
is applicable for all  transactions  issued after May 20, 1999. In its consensus
the EITF specified that no contingent  beneficial  conversion  feature was to be
recognized in earnings until the contingency is resolved.  During the year ended
July 31, 2000, the Company failed to collect certain  receivables as required by
the terms of the Series B Shares.  In addition,  as of and subsequent to October
31, 2000, the Company did not the meet  specified  quarterly  earnings  targets.
Because the  Company did not meet these  commitments,  the  conversion  rate was
adjusted  such that as of July 31,  2001,  the Series B Shares were  convertible
into 3,950,214  Common Shares.  Management  discovered  that the Company did not
appropriately apply the provisions of EITF 98-5 to record beneficial conversions
as the receivable  collection and earnings  target  contingencies  were resolved
during the year ended July 31, 2001. Accordingly,  the Company recorded a deemed
dividend to the holder of the Series B Shares in the amount of $5,801,000 in the
fourth quarter of fiscal 2001. This amount  increased the net loss applicable to
common shareholders (both basic and diluted) by $0.95 per share.

   Share Purchase Warrants

      In October 1999, in connection  with the sale of the Series B Shares,  the
Company modified the terms of warrants to purchase  2,000,000 Common Shares that
had been issued in connection with the Series A Shares. The modification reduced
the  exercise  price of the  warrants  from $12 per share to $6.75 per share and
extended the term of the warrants to October 1, 2004.  The Company may force the
exercise of the warrants upon  satisfaction  of all the

                                       41
<PAGE>

Triggering Conditions, except that the Company's net income before income taxes,
dividends  on the  Series A Shares  and  Series B Shares,  and  amortization  of
goodwill and covenants not to compete for the three consecutive  fiscal quarters
preceding  the  applicable  date shall have  averaged at least $0.35  instead of
$0.22 per fully diluted Common Share per fiscal quarter.

      In November 2000, the EITF reached a consensus in EITF 00-27, "Application
of Issue No. 98-5 to Certain  Convertible  Instruments," which clarified certain
matters regarding the application of EITF 98-5.  Companies are required to adopt
EITF 00-27  prospectively to securities issued after November 16, 2000. However,
the SEC concluded that the consensus reached by the EITF in EITF 00-27,  Issue 1
of Part II, must be applied to all transactions  subject to EITF 98-5, including
those  transactions  occurring before November 16, 2000. The effect,  if any, of
the  initial  application  of the  consensus  on Issue 1 of Part II to all prior
transactions  subject  to Issue  98-5 is to be  recognized  in the  registrant's
fiscal year quarter in which the  consensus  was reached in a manner  similar to
the cumulative effect of a change in accounting  principle.  The Company did not
adopt  EITF 00-27 in the second  quarter of the year ended July 31,  2001,  even
though the Series B Shares transaction was subject to EITF 98-5. However, during
the fourth  quarter of the year ended July 31,  2001,  the  Company  changed its
method of accounting for convertible  securities to adopt the provisions of EITF
00-27. Upon adoption management  concluded that a portion of the proceeds of the
Series B Shares  should have been  allocated to the warrants  upon  modification
based on their relative fair value to the Series B Shares.  At the original date
of the  modification  of the  warrants  the Company did not  allocate any of the
proceeds  of the Series B Shares to the  warrants.  Management  determined  that
$1,554,000 of the Series B Shares  proceeds  should be allocated to the warrants
using  Black-Scholes  computations.  The Company has  recorded the effect of the
reallocation of the proceeds from the Series B Shares to the warrants  through a
recassification  of the $1,554,000 between the Series B Shares and Common Shares
in the consolidated  statement of  shareholders'  equity for the year ended July
31, 2000.  The  cumulative  effect of the change in accounting of $1,554,000 has
been reflected as a deemed  dividend to the holder of the Series B Shares in the
consolidated  statement of  operations  for the year ended July 31,  2001.  This
effect increased the net loss applicable to common  shareholder  (both basic and
diluted) by $0.25 per share.

   Stock Option Plans

      The  Company  has two stock  option  plans,  the Stock  Option Plan ("1993
Plan") and the Second Amended and Restated  Stock Award Plan ("1996  Plan").  At
July 31, 2001,  the 1996 Plan  provided  for the grant to  officers,  directors,
employees, and consultants of incentive and non-qualified options to purchase up
to 3,500,000 Common Shares. The 1996 Plan was amended in August 2001 and October
2001 to increase the number of Common Shares for which options may be granted to
4,000,000 and  4,500,000,  respectively.  There are options to purchase  120,000
Common  Shares  outstanding  under the 1993  Plan;  no further  options  will be
granted  under the 1993 Plan.  The exercise  price of options  granted under the
1996 Plan may not be less  than 75% of the fair  market  value of the  Company's
Common  Shares at the date of grant  (100%  for  tax-qualified  incentive  stock
options).  Options  become  exercisable  at the date of grant or in equal annual
installments  over a period of one to four  years  from the date of  grant.  The
options  generally  expire either five or ten years after the date of grant.  In
addition  to the  options  granted  under  the 1993 Plan and the 1996  Plan,  an
additional  80,000 options were granted during the years ended July 31, 1999 and
1998 to consultants in connection with capital raising and other activities.

      The 1996 Plan also  provides for the grant of stock  appreciation  rights,
restricted units,  performance awards and other stock-based  awards. The Company
had no such awards or rights outstanding at July 31, 2001, 2000 or 1999.

                                       42
<PAGE>

      The activity  during the years ended July 31,  2001,  2000 and 1999 was as
follows:
<TABLE>
<CAPTION>
                                                   2001                   2000                   1999
                                                   ----                   ----                   ----

                                                       WEIGHTED               WEIGHTED                   WEIGHTED
                                                       AVERAGE                AVERAGE                    AVERAGE
                                                       EXERCISE               EXERCISE                   EXERCISE
                                       OPTIONS          PRICE       OPTIONS    PRICE       OPTIONS        PRICE
                                       -------          -----       -------    -----       -------        -----

<S>                                  <C>                <C>        <C>          <C>       <C>            <C>
Outstanding - beginning of year      2,574,000          $6.17      2,108,000    $6.73     1,640,000      $7.48

   Granted                           1,413,000           2.52        853,000     5.20       655,000       5.56
   Exercised                           (60,000)          1.28             --       --            --         --
   Canceled                           (221,000)          6.89       (387,000)    7.09      (187,000)      8.70
                                     ---------                     ---------              ---------
Outstanding - end of year            3,706,000           4.82      2,574,000     6.17     2,108,000       6.73
                                     =========                     =========              =========

Exercisable at end of year           1,646,633          $6.05      1,240,953    $6.41       808,441      $6.53
                                     =========                     =========                =======

Weighted-average fair value of
   options granted during the year                      $2.28                   $3.42                    $4.26
                                                        =====                   =====                    =====
</TABLE>

      The following table summarizes information about stock options outstanding
at July 31, 2001:
<TABLE>
<CAPTION>

                                                OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
                          ----------------------------------------------------------------   -------------------------------------
                                                      WEIGHTED-
                           NUMBER OUTSTANDING          AVERAGE              WEIGHTED-         NUMBER EXERCISABLE          WEIGHTED
                                                      REMAINING              AVERAGE                                       AVERAGE
       RANGE OF                  AS OF            CONTRACTUAL LIFE          EXERCISE                 AS OF                EXERCISE
   EXERCISE PRICES           JULY 31, 2001                                    PRICE              JULY 31, 2001              PRICE
-----------------------   ---------------------  --------------------   ------------------   ----------------------   ------------
<S>      <C>     <C>                 <C>                <C>                          <C>                   <C>           <C>
         $2.01-- $3.50               1,355,000          9.85                         2.37                  170,000       2.35
         3.51 --  5.00                 475,000          8.44                         4.16                  238,213       4.16
         5.01 --  6.50               1,028,000          6.08                         5.94                  562,670       6.00
         6.51 --  8.00                 636,600          5.64                         6.94                  517,200       6.97
         8.01 --  9.50                  56,000          4.18                         8.24                   42,000       8.24
         9.51 -- 12.00                 155,400          6.51                        10.68                  116,550      10.68
-----------------------   ---------------------                                              ----------------------

        $2.00-- $12.00               3,706,000          7.67                        $4.81                1,646,633     $ 6.05
                          =====================                                              ======================
</TABLE>

   Stock options available for future grant totaled 0 and 251,000 at July 31,
2001, and 2000, respectively.



                                       43
<PAGE>


      No  compensation  cost has been  recognized for the Company's stock option
grants to  employees  under APB No. 25 because  the  underlying  value of common
stock on the date of grant has equaled or  exceeded  the  exercise  price of the
options.  Total compensation cost recognized in the statements of operations for
options granted to non-employees  under SFAS No. 123 during the years ended July
31, 2001, 2000, and 1999, was $10,000, $26,000, and $203,000,  respectively. Pro
forma information regarding net income (loss) and net income (loss) per share is
required  under  SFAS No.  123 and has been  determined  as if the  Company  had
accounted for all its stock option  grants based on the fair value  method.  The
pro forma information  presented below is not representative of the effect stock
options will have on pro forma net income  (loss) or net income (loss) per share
for future years.

      The fair  value of each  option  grant is  estimated  on the date of grant
using the Black-Scholes  multiple  option-pricing  model. The following weighted
average  assumptions  were used for grants during the years ended July 31, 2001,
2000,  and  1999:   risk-free   interest  rates  of  5.44%,   6.04%  and  5.92%,
respectively;  an expected option life of 9.83 years, 9.59 years and 9.60 years,
respectively;  expected  volatility  of 122%,  106% and 90%,  respectively;  and
dividend yield of zero.

      The Black-Scholes  method is one of many models used to calculate the fair
value of options that are freely tradable,  fully  transferable and that have no
vesting restrictions.  These models also require highly subjective  assumptions,
including future stock price volatility and expected time until exercise,  which
greatly affect the calculated values.

      Had  compensation  cost for these plans been determined  based on the fair
value of awards at the grant date,  as  prescribed by SFAS No. 123, net loss and
net loss per share would have been as follows for the years ended July 31, 2001,
2000, and 1999:

                                                2001      2000      1999
                                                ----      ----      ----
                                       (in  thousands,   except  per share data)

       Net loss attributable to common shareholders:
          As reported........................$(14,714) $(3,101)  $(4,884)
          Pro forma..........................$(17,514) $(5,897)  $(6,176)
       Net loss per share (basic and diluted):
          As reported........................$(2.41)    $(0.51)   $(0.80)
          Pro forma..........................$(2.87)    $(0.97)   $(1.01)

      Compensation expense recognized in providing pro forma disclosures may not
be representative of the effects on pro forma net income (loss) for future years
because options vest over several years,  additional options may be granted each
year, and assumptions can change.

   Common Shares Reserved

   Common Shares reserved for future issuance at July 31, 2001, are as follows
(in thousands):

      Series A convertible preferred shares             2,667
      Series B convertible preferred shares             3,950
      Common share warrants                             2,000
      Stock option plans                                3,706
                                                      -------
                                                       12,323
                                                      =======

                                       44
<PAGE>


   Retained Earnings

      For as long as the Company's  majority  shareholder  owns at least 666,666
Series A Shares or Series B Shares or Common  Shares  into which such  preferred
shares are convertible,  the Company may not without such holder's consent,  pay
any dividend or distribution on its Common Shares.  In addition,  under its line
of credit  with a  commercial  bank,  the  Company is required to maintain a net
worth of $24,700,000.  The Company is restricted in its ability to pay dividends
based on this net worth  requirement  and available  cash.  See Note 7, Lines of
Credit.

NOTE 9. INCOME TAXES

Sonus Corp.  and its Canadian  subsidiary  file  separate  corporate  income tax
returns on a stand-alone basis in Canada.  Sonus-USA,  Inc. and its subsidiaries
file corporate  income tax returns in the United  States.  There is no provision
for  income  taxes for the years  ended  July 31,  2001,  2000,  and 1999 as the
Company incurred net operating losses.

A reconciliation  of the Company's  expected tax benefit using the United States
federal  statutory  income tax rate to the actual  effective  rate for the years
ended July 31, 2001, 2000, and 1999 is as follows:

                                              2001        2000         1999
                                              ----        ----         ----
   Tax benefit at statutory rate.......
   Adjustment for higher Canadian tax         (34)%       (34)%        (34)%
    rate...............................       ---           1          ---
   Expenses not deductible for tax
   purposes............................         3           7            5
   State taxes, net of federal.........        (5)          (6)         (5)
   Change in valuation allowance
   impacting statement of operations...        36          32           34
                                               --          --           --
   Tax rate per financial statements...        --- %        --- %       --- %
                                               ----         ----        ----

      The  components  of temporary  differences  that give rise to  significant
portions of deferred income taxes are as follows at July 31 (in thousands):

                                                  2001       2000      1999
                                                  ----       ----      ----
   Deferred tax assets:
    Net operating loss carryforwards........  $   8,983   $  5,371   $ 4,754
    Allowance for doubtful accounts.........        604      1,462       364
    Capitalized financing costs.............        228        473       694
    Other...................................        255        135        32
                                                 ------    -------   --------
                                                 10,070      7,441     5,844
   Deferred tax liabilities:
     Property and equipment due to differences     (662)     (609)       (83)
   in depreciation..........................
     Goodwill and start-up costs............       (268)     (368)      (305)
                                                 -------  --------   --------
                                                   9,140    6,464      5,456
   Less valuation allowance.................      (9,140) $(6,464)  $ (5,456)
                                                 -------  -------   --------
                                                 $    --  $    --   $     --
                                                 =======  =======   ========


      At July 31,  2001,  the Company had federal and state net  operating  loss
carryforwards  of  $19,100,000.  The Company also had $3,000,000 of Canadian net
operating  loss  carryforwards.  The  federal and state and  Canadian  operating
losses expire at various dates through 2021 if not utilized.

      A provision of the Internal  Revenue Code requires that the utilization of
net  operating  losses  be  limited  when  there is a change of more than 50% in
ownership  of the  Company.  Such a  change  occurred  in  December  1997.  This
ownership  change may limit the  utilization  of any United  States  federal net
operating losses incurred prior to the change in ownership date.

                                       45
<PAGE>


NOTE 10.  RELATED PARTY TRANSACTIONS

      Gregory J. Frazer,  Ph.D.,  an officer and former director of the Company,
and Mr.  Frazer's  wife were  shareholders  in certain  Hearing Care  Associates
corporations  that the Company  acquired  during the fiscal years ended July 31,
1998 and 1997.  During  the year  ended  July 31,  1999,  the  Company  issued a
three-year  promissory  note to Mr. Frazer in the principal  amount of $102,000,
payable in equal  quarterly  installments,  in connection  with  purchase  price
adjustments  for hearing care centers  previously  acquired from Mr. Frazer.  At
July 31, 2001,  the note had a balance of $8,500.  Interest  paid to Mr.  Frazer
with  respect to the note for the years  ended  July 31,  2001,  2000,  and 1999
totaled $2,380, $5,100, and $3,570, respectively.  The Company also entered into
expanded  non-compete  agreements  with Mr.  Frazer and his wife that pay them a
total of $10,758 per month until September 2001.

      Mr.  Frazer and his wife have the right,  until  September  30,  2001,  to
require the Company to redeem an aggregate of 1,680 of their Common Shares as of
the last  day of each  calendar  quarter  at a price of  $8.35  per  share.  The
redemption rights are  non-cumulative  and expire if not exercised as of the end
of any calendar quarter as to such quarter.  Pursuant to such redemption rights,
the  Company  redeemed  from Mr.  Frazer  and his wife 5,040  Common  Shares for
consideration of $42,084 during each of the fiscal years ended July 31, 2001 and
2000.

      On May 8, 1997, Brandon M. Dawson, an officer and director of the Company,
exercised  options for 50,000  Common  Shares at $1.35 per share.  In connection
with the  exercise,  the Company made loans of $67,500 and $91,000 to Mr. Dawson
on May 8, 1997, and April 24, 1998, respectively, to allow Mr. Dawson to pay the
aggregate  exercise  price of the options and taxes  incurred as a result of the
exercise.  The loans, which bore interest at 10% and 7.75%,  respectively,  were
repaid on July 6, 1999,  along with  interest of $16,077.  On December 26, 1997,
the Company  loaned Mr.  Dawson  $29,187 in order to allow Mr. Dawson to repay a
loan  obtained in  connection  with the  exercise of options to purchase  20,000
Common  Shares.  The loan was repaid on March 30, 1999,  along with  interest at
7.75% per annum in the amount of $4,287.  On March 19, 1998,  the Company loaned
Mr.  Dawson  $35,790,  in order to pay  taxes  incurred  as a result  of  option
exercises  in April  1996.  The loan,  which  matured on  December  31, 2000 and
remains outstanding,  continues to bear interest at 7.75% per annum. The Company
recognized $8,000, $0, and $0, of interest income from the note during the years
ended July 31, 2001,  2000, and 1999,  respectively.  At July 31, 2001 and 2000,
accrued interest on the note totaled $8,000 and $0, respectively.

      On December 8, 1998, the Company  loaned Scott Klein,  President and Chief
Operating  Officer of the Company,  $100,000 in connection  with the purchase of
his primary residence in Portland,  Oregon. The loan was repaid on June 7, 1999,
along with interest at 8% in the amount of $4,000.

      On July 21, 1999, Cindy  Dawson-Austin,  mother of Mr. Dawson,  loaned the
Company $500,000 for working  capital.  The loan, along with interest at 12% per
annum in the amount of $23,342, was repaid on December 10, 1999.

      In April 1999, Mr. Dawson  purchased from an unrelated party a convertible
note in the principal  amount of $492,693 that had been issued by the Company in
October 1996. The note was repaid on December 10, 1999.

      On December 19, 2000,  the Company loaned Mr. Dawson $75,000 in connection
with the exercise by Mr. Dawson of previously  granted stock  options.  The full
recourse loan,  which bears interest at 9.5%, is secured by 60,000 Common Shares
and is due on  December  19,  2001.  The Company  recognized  $4,000 in interest
income on the note  during  the year  ended  July 31,  2001.  At July 31,  2001,
interest accrued on the note totaled $4,000.

      At July 31, 2001, the Company has a short-term advance due from Mr. Dawson
in the amount of $53,000. The advance is unsecured and non-interest bearing.

                                       46
<PAGE>


NOTE 11.  401(K) PLAN

      The Company  sponsors a 401(k) plan for all employees  who have  satisfied
minimum  service and age  requirements.  Employees  may  contribute up to 20% of
their compensation to the plan, subject to annual limitations under federal law.
The Company does not match employee contributions.

NOTE 12.  COMMITMENTS AND CONTINGENCIES

   Operating Leases

      The Company leases office equipment and office space under  non-cancelable
operating  leases.  The Company's  office space leases contain  renewal  options
ranging from one to five years and rent escalation clauses based on the consumer
price index or defined escalation amounts set forth in the lease agreements.

      The following is a schedule by year of future  minimum lease  payments for
non-cancelable operating leases at July 31, 2001 (in thousands):

   Year ending July 31:
   2002.....................................................$1,804
   2003..................................................... 1,351
   2004.....................................................   989
   2005.....................................................   340
   2006.....................................................    95
                                                            ------
   Total minimum lease payments                             $4,579
                                                            ======

      Rental expense under  operating  leases was  $2,901,000,  $2,528,000,  and
$2,236,000 for the years ended July 31, 2001, 2000, and 1999, respectively.

   Contingent Payments

      The terms of certain of the Company's  acquisition  agreements provide for
additional consideration to be paid if the acquired entity's revenues or results
of operations  exceed certain target levels.  Such additional  consideration  is
paid in cash and is  recorded  when earned as  additional  purchase  price.  The
maximum amount of contingent  consideration  that the Company may be required to
pay is $421,000 for the year ended July 31, 2002 and $246,000 thereafter.

   Regulatory Matters

      A portion of the Company's  revenues  comes from the Medicare and Medicaid
programs.  Laws and regulations governing these programs are complex and subject
to  interpretation.  Except  as  noted  below,  the  Company  believes  that its
operations are in substantial compliance with existing laws that are material to
its  operations.  Any failure or alleged  failure to comply with applicable laws
and regulations could result in sanctions or penalties, including exclusion from
participation in the Medicare,  Medicaid,  and other  government  programs which
could have a material  adverse  effect on the Company's  consolidated  financial
statements.

      During the year ended July 31, 2001,  the Company  discovered  that it had
improperly  submitted certain claims to the State of California Medi-Cal program
("Medi-Cal")  for  hearing   services  and  instruments   provided  to  Medi-Cal
enrollees,  as a result of services being performed by audiologists  and hearing
instrument  dispensers who had not been  credentialed  by Medi-Cal.  The Company
determined that it had received $474,000 and $566,000 during calendar years 2000
and 1999,  respectively,  that related to these improperly submitted claims. The
Company reported its discovery to Medi-Cal and received a response acknowledging
the Company's  representations to Medi-Cal that steps have been taken to prevent
a  reoccurrence.  Medi-Cal has not requested  that the Company repay the amounts
received and management  believes that it is unlikely that Medi-Cal will request
repayment in the future.  However, the ultimate  determination of this matter is
presently  unknown  and could have a material  adverse  effect on the  Company's
consolidated financial statements.

                                       47
<PAGE>

   Litigation

      The Company has filed a lawsuit against Siemens Hearing Instruments,  Inc.
("Siemens") for breach of a hearing  instrument  supply  agreement.  The lawsuit
seeks damages in excess of $4,300,000.  Siemens has filed a counterclaim against
the Company  alleging  that  Siemens is owed  $920,000  for hearing  instruments
purchased by the Company on account and $104,000 for failure to pay a promissory
note  assumed  by the  Company.  As  this  litigation  is in its  early  stages,
management,  in  consultation  with outside legal counsel,  has not finalized an
opinion as to the ultimate outcome.

      During the year ended  July 31,  2001,  the  Company  favorably  settled a
lawsuit it had filed against a supplier.  The  settlement  resulted in a gain of
$554,000 to the Company  that is  recorded in "Other,  net" in the  consolidated
statement of operations.

      The Company is a party to various other lawsuits and claims  incidental to
its business.  In the opinion of management,  the ultimate  disposition of these
matters will not have a material  adverse  effect on the Company's  consolidated
financial statements.

   Insurance Coverage

      In the  ordinary  course of its  business  the  Company  may be subject to
professional and products liability claims.  Professional and products liability
insurance coverage is obtained through the Company's general liability insurance
from an independent  insurance company. The maximum coverage level is $6,000,000
per  occurrence.  The Company  believes that it would have recourse  against the
manufacturer in the event of a product liability claim; however, there can be no
assurance  that  recourse  against  a  manufacturer  by  the  Company  would  be
successful  or  that  any  manufacturer  will  maintain  adequate  insurance  or
otherwise be able to pay any liability resulting from such a claim.

      The Company maintains workers' compensation  insurance coverage through an
independent  insurance company and is self-insured for employee health benefits.
The Company  accrues for future  liability  arising from health  benefit  claims
based on a history of past claims.  The accrued  reserves  for  employee  health
benefits  include known  liabilities  of the program and an estimate of incurred
but not reported claims.

   California Board of Equalization Audit

      The  California  Board  of  Equalization  has  commenced  an  audit of the
Company's  California sales and use tax returns for the period from July 1998 to
June 2001.  Based on a review of periods subject to audit,  management  believes
that the Company may owe an  additional  $200,000 and has  therefore  recorded a
liability in this amount at July 31, 2001, through a charge to income during the
year ended July 31, 2001.

   Supply Agreements

      During  the  years  ended  July 31,  2001,  2000,  and 1999,  the  Company
purchased a majority of its hearing  instruments  from Siemens.  The Company has
mitigated  its  exposure to the loss of Siemens as a supplier  by  shifting  its
business to other hearing instrument suppliers.

      Concurrent with the execution of the Credit Agreement, the Company entered
into a  seven-year  sales  agreement  (the "Sales  Agreement")  with the hearing
instrument supplier.  Beginning with the period from October 1, 2001 to December
31 2001,  and for each  calendar  year  thereafter,  the  Company is required to
purchase  a minimum  number of hearing  instruments  from the  supplier.  If the
minimum purchase  requirement is not met in any period,  the Company is required
to refund to the  supplier a portion of the  discounted  sales  price of hearing
instruments  purchased by the

                                       48
<PAGE>
Company during such period.  The Company is unable to estimate its future annual
purchase  commitments under the Sales Agreement because such annual  commitments
vary based upon certain  factors that are not  determinable at the present time.
See Note 7, Lines of Credit.

   Termination Benefits

      During the year ended July 31,  2001,  the  Company  recorded  $166,000 of
termination  benefits  associated  with  the  cost of  terminating  an  employee
contract. The amount has been included in general and administrative expenses.

NOTE 13.  SEGMENT INFORMATION

      The Company has one operating  segment:  the sale and servicing of hearing
instruments  and the  provision of audiology  services  primarily to  individual
consumers. No customer constituted more than 10% of total revenues.  Revenues by
country were as follows for the years ended July 31:

      (in thousands)               2001        2000       1999
                                   ----        ----       ----
      United States........       $45,667    $40,353     $30,511
      Canada...............         3,267      3,606       3,248
                                    -----      -----       -----
      Total................       $48,934    $43,959     $33,759
                                  =======    =======     =======

      The  functional  currency  of the  Company's  Canadian  operations  is the
Canadian  dollar while the  functional  currency of the Company's  United States
operations is the United States dollar. In accordance with SFAS No. 52, "Foreign
Currency  Translation",  assets and liabilities recorded in Canadian dollars are
remeasured at current rates in existence at the balance sheet date. Revenues and
expenses are remeasured using the weighted average exchange rate for the period.
Exchange gains and losses from remeasurement of assets and liabilities  recorded
in Canadian dollars are treated as unrealized gains and losses and reported as a
separate component of shareholders' equity.

      The historical  effects of the change in currency exchange rates have been
immaterial.  At July 31, 2001 and 2000, the net assets of the Company located in
Canada total $1,404,000 and $1,962,000, respectively.

NOTE 14.  SUBSEQUENT EVENTS

      In August 2001, the Company  acquired two hearing care centers for a total
purchase price of $510,000.  The Company has paid $375,000 of the total purchase
price in cash,  with $33,750 due in March 2002 and the remaining  balance due in
annual  principal  payments of $33,750  beginning in August 2002 through  August
2004. The transaction was accounted for as a purchase.

NOTE 15.  QUARTERLY RESULTS OF OPERATIONS  (UNAUDITED)

      During the fourth quarter the Company made certain  adjustments  that were
material to the  results of each  quarter  during the year ended July 31,  2001.
These adjustments primarily related to the adjustment of amounts due to and from
certain  vendors based on a change in  management's  estimate of amounts owed, a
change in the method of  accounting  for revenue  under SAB 101, a change in the
method  of  accounting  for  beneficial   conversions   related  to  convertible
securities,  an additional  accrual for marketing  expenses  based on changes in
management's estimates, and a reduction of revenue based on management's revised
estimate  of  contractual  allowances.  See  also  Notes  1, 8,  and  12.  These
adjustments  decreased  and  (increased)  the net loss  attributable  to  common
shareholders by quarter as follows:

                                       49
<PAGE>
<TABLE>
<CAPTION>

                                                                                       Quarter Ended
                                                                -------------------------------------------------------------------
                                                                 October 31,       January 31,       April 30,         July 31,

                                                                    2000              2001             2001              2001
                                                                    ----              ----             ----              ----
                                                                                           (in thousands)
<S>                                                               <C>                    <C>             <C>                <C>
      Adjust amounts due to/from vendors                         $   ---           $   ---          $   ---            $(1,996)
      Change in accounting for revenue                            (2,220)               (4)              36                 68
      Beneficial conversion related to warrant modification          ---            (1,554)             ---                ---
      Quarterly effect of deemed dividends to preferred           (4,890)             (297)            (304)              (310)
         shareholder upon contingency resolution
      Additional marketing expenses accrual                          ---               ---              (25)               (78)
      Restatement of revenues                                     (1,028)             (918)            (854)            (1,004)
                                                                  ------              ----             ----             ------
                                                                $ (8,138)         $ (2,773)         $ (1,147)         $ (3,320)
                                                                 =======           =======           =======           =======
</TABLE>

These  adjustments  increased  the net  loss  per  share  applicable  to  common
shareholders by $1.34, $0.46, $0.18, and $0.54, in the first, second, third, and
fourth quarters, respectively.

      The following is a summary of the quarterly  results of operations for the
year ended July 31, 2001, as previously  reported and as restated to reflect the
effect of the adjustments noted above.


                                       50
<PAGE>

<TABLE>
<CAPTION>

                                                                             Quarter Ended
                                        -------------------------------------------------------------------------------------------
                                               October 31, 2000              January 31, 2001               April 30, 2001
                                           As Previously                    As Previously                  As Previously
                                           Reported      As Restated       Reported      As Restated      Reported     As Restated
                                        -------------------------------------------------------------------------------------------
                                                                    (in thousands, except per share data)

<S>                                       <C>             <C>               <C>          <C>             <C>          <C>
Net Revenues                              $   13,562      $12,428           $12,370      $11,448         $12,889      $12,070
Product gross profit                           6,603        5,233             5,901        4,765           5,667        4,575
Income (loss) from operations                    191         (943)              232         (690)            107         (737)
Income (loss) before cumulative effect
of change in accounting principle                104       (1,030)              728         (194)             28         (816)
Cumulative effect of change in
accounting principle                             ---       (2,114)              ---          ---             ---          ---
Net income (loss)                                104       (3,144)              728         (194)             28         (816)
Deemed dividends to preferred
shareholder                                      ---       (4,890)              ---       (1,851)            ---         (304)
Net income (loss) attributable to
common shareholders                              104       (8,034)              728       (2,045)             28       (1,120)
Income (loss) per share before cumulative
effect of change in accounting principle
(basic)                                         0.02        (0.17)             0.12        (0.04)           0.00        (0.13)
Income (loss) per share before cumulative
effect of change in accounting principle
(diluted)                                       0.01        (0.17)             0.06        (0.04)           0.00        (0.13)
Cumulative effect of change in
accounting principle per share (basic
and diluted)                                     ---        (0.35)              ---          ---             ---          ---
Deemed dividends to preferred
shareholder (basic and diluted)                  ---        (0.80)              ---        (0.30)            ---        (0.05)
Net income (loss) per share
attributable to common shareholders
(basic)                                         0.02        (1.32)             0.12        (0.34)           0.00        (0.18)
Net income (loss) per share
attributable to common shareholders
(diluted)                                       0.01        (1.32)             0.06        (0.34)           0.00        (0.18)
</TABLE>
<TABLE>
<CAPTION>
                                           July 31, 2001
                                           -------------
                                           As Reported
                                           -----------

<S>                                         <C>
Net Revenues                                $12,988
Product gross profit                          4,033
Income (loss) from operations                (3,011)
Income (loss) before cumulative effect
of change in accounting principle            (3,205)
Cumulative effect of change in
accounting principle                            ---
Net income (loss)                            (3,205)
Deemed dividends to preferred
shareholder                                    (310)
Net income (loss) attributable to
common shareholders                          (3,515)
Income (loss) per share before cumulative
effect of change in accounting principle
(basic)                                       (0.52)
Income (loss) per share before cumulative
effect of change in accounting principle
(diluted)                                     (0.52)
Cumulative effect of change in
accounting principle per share (basic
and diluted)                                    ---
Deemed dividends to preferred
shareholder (basic and diluted)               (0.05)
Net income (loss) per share
attributable to common shareholders
(basic)                                       (0.57)
Net income (loss) per share
attributable to common shareholders
(diluted)                                     (0.57)
</TABLE>


                                       51
<PAGE>

The following is a summary of the quarterly  results of operations  for the year
ended July 31, 2000.
<TABLE>
<CAPTION>
                                                                                   Quarter ended
                                                                                   -------------
                                                   October 31, 1999     January 31, 2000    April 30, 2000      July 31, 2000
                                                   ----------------     ----------------    --------------      -------------
                                                                     (in thousands, except per share data)
<S>                                                      <C>             <C>                 <C>               <C>
Net revenues                                             $10,102         $    10,387         $    12,083       $    11,387
Product gross profit                                       5,803               6,072               6,717             5,773
Income (loss) from operations                               (569)               (530)                 86            (1,987)
Net income (loss)                                           (623)               (521)                111            (2,068)
Net income (loss) per share (basic)                        (0.10)              (0.09)               0.02             (0.34)
Net income (loss) per share (diluted)                      (0.10)              (0.09)               0.01             (0.34)
</TABLE>


ITEM 9.  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

      The  information  required by this item has been  previously  filed by the
Company in its Current  Report on Form 8-K dated  November  17,  2000,  filed on
November 28, 2000,  and its Current  Report on Form 8-K dated December 14, 2000,
filed on December 20, 2000.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information  with respect to the directors  and executive  officers of the
Company and compliance with Section 16(a) of the Securities Exchange Act of 1934
is  incorporated  herein by reference  to the  Company's  definitive  Management
Information  Circular and Proxy  Statement  dated  November 30, 2001 (the "Proxy
Statement"),  under the headings "Section 16(a) Beneficial  Ownership  Reporting
Compliance" and "2. Election of Directors."

ITEM 11. EXECUTIVE COMPENSATION

   The required information is incorporated herein by reference to the Proxy
Statement under the heading "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The required information is incorporated herein by reference to the Proxy
Statement under the heading "Share Ownership By Principal Shareholders and
Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The required information is incorporated herein by reference to the Proxy
Statement under the heading "Compensation Committee Interlocks and Insider
Participation."


                                       52
<PAGE>

                                   PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

   (a)      (1) The  following  financial  statements  are  filed as a part of
this report:

(i)   Consolidated Balance Sheets as of July 31, 2001 and 2000.
(ii)  Consolidated  Statements  of  Operations  for the years  ended  July 31,
         2001, 2000, and 1999.
(iii)       Consolidated Statements of Changes in Shareholders' Equity for the
            years ended July 31, 2001, 2000, and 1999.
(iv)     Consolidated Statements of Cash Flows for the years ended July 31,
         2001, 2000, and 1999.

      (2) Schedule II - Valuation and Qualifying Accounts, is filed as a part of
   this report and contained on page 57. All other schedules for which provision
   is made in the applicable accounting regulations of the Securities and
   Exchange Commission are not required under the related instructions or are
   inapplicable and therefore have been omitted.

      (3) Exhibits to this report are listed in the Exhibit Index on page 55.
   Each management contract or compensatory plan or arrangement required to be
   filed as an exhibit to this report is marked with an asterisk in the Exhibit
   Index.

      (b)  Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the fourth quarter of the fiscal year ended July 31, 2001.

                        -------------------------------

      The following shall be deemed incorporated by reference into Item 5 of the
registrant's Registration Statements on Form S-8 (Nos. 333-57673 and 333-83151):

      Sonus  Corp.  has agreed to  indemnify  and hold KPMG LLP (KPMG)  harmless
against  and from any and all legal costs and  expenses  which KPMG may incur in
connection with KPMG's successful defense of any legal action or proceeding that
may arise as a result of its consent to the inclusion of its audit report on the
registrant's past financial statements included in this registration  statement,
whether brought under the federal securities laws, other statutes, common law or
otherwise,  except  a court  adjudication  that  it is  guilty  of  professional
malpractice  or if it becomes  liable for any part of a  plaintiff's  damages by
virtue of settlement

                                       53
<PAGE>

                                  SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date: December 4, 2001       SONUS CORP.
                             By  /s/ Daniel J. Kohl
                             --------------------------------
                             Daniel J. Kohl
                             Chief Executive Officer

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated as of December 4, 2001.

           SIGNATURE                       TITLE

/s/ Brandon M.Dawson          Chairman and Director
----------------------------
    Brandon M. Dawson


/s/ Daniel J. Kohl            Chief Executive Officer and Director
----------------------------
    Daniel J. Kohl


/s/ Scott Klein               President and Chief Operating Officer
----------------------------
    Scott Klein


/s/ Mark Richards             Senior Vice President and Chief Financial Officer
----------------------------  (Principal Financial Officer)
    Mark Richards


/s/ Douglas A. Pease          Controller
---------------------------- (Principal Accounting Officer)
    Douglas A. Pease


A MAJORITY OF OTHER DIRECTORS:


        *JOEL ACKERMAN          Director


   *HAYWOOD D. COCHRANE, JR.    Director


       * LESLIE H. CROSS        Director


       *MICHAEL T. FIORE        Director


      *GREGORY G. SCHOTT        Director


      *DAVID J. WENSTRUP        Director


      /s/ Mark Richards
     -------------------------
     *By Mark Richards, as attorney-in-fact


                                       54
<PAGE>

                                EXHIBIT INDEX

   EXHIBIT                  DESCRIPTION OF EXHIBIT

     3.1   Articles of Incorporation  of the Company.  Incorporated by reference
           to Exhibit 3.1 to the Company's  Annual Report on Form 10-KSB for the
           fiscal year ended July 31, 1999 (the "1999 Form 10-KSB").
     3.2   Bylaws of the  Company.  Incorporated  by reference to Exhibit 3.2 to
           the Company's  quarterly  report on Form 10-QSB for the quarter ended
           January 31, 1999.
     10.1  Securities Purchase Agreement between the Company and Warburg, Pincus
           Ventures,  L.P. ("Warburg") dated November 21, 1997.  Incorporated by
           reference to Exhibit 99.2 to the Company's current report on Form 8-K
           filed November 25, 1997.
     10.2  Securities  Purchase  Agreement between the Company and Warburg dated
           October  1,  1999.  Incorporated  by  reference  to  Exhibit 4 to the
           Company's current report on Form 8-K filed October 12, 1999.
     10.3  Amended  and  Restated  Warrant  Agreement  between  the  Company and
           Warburg  dated  October 1, 1999,  and related  Amended  and  Restated
           Warrant Certificate dated October 1, 1999.  Incorporated by reference
           to Exhibit 10.3 to the 1999 Form 10-KSB.
     10.4  Form of Convertible  Subordinated Note.  Incorporated by reference to
           Exhibit 10.4 to the 1999 Form 10-KSB.
     10.5  1993 Stock Option Plan. Incorporated by reference to Exhibit 10.26 to
           the  Company's  Registration  Statement  on Form SB-2 filed March 12,
           1997 (File No. 333-23137) (the "SB-2).*
     10.6  Second Amended and Restated  Stock Award Plan (as amended  October 4,
           2001).*
     10.7  Employment  Agreement dated October 1, 1996, between  Sonus-USA,  and
           Gregory J. Frazer.  Incorporated by reference to Exhibit 10.28 to the
           SB-2.*
     10.8  Employment Agreement dated December 24, 1997, between the Company and
           Brandon M. Dawson.  Incorporated  by  reference  to Exhibit  10.30 to
           Post-Effective Amendment No. 1, filed March 5, 1998 to the SB-2.*
     10.9  Amendment to Employment Agreement effective May 21, 2001, between the
           Company and Brandon M. Dawson.*
     10.10 Employment  Agreement dated October 30, 1998, between the Company and
           Scott  Klein.  Incorporated  by  reference  to  Exhibit  10.1  to the
           Company's  quarterly  report on Form  10-QSB  for the  quarter  ended
           October 31, 1998.*
     10.11 Amendment to Employment  Agreement  effective June 20, 2001,  between
           the Company and Scott Klein.*
     10.12 Employment Agreement dated February 11, 2000, between the Company and
           Paul C.  Campbell.  Incorporated  by  reference  to Exhibit 10 to the
           Company's  quarterly  report on Form  10-QSB  for the  quarter  ended
           January 31, 2000.*
     10.13 Employment  Agreement effective May 21, 2001, between the Company and
           Daniel J. Kohl.  Incorporated  by  reference  to Exhibit  10.1 to the
           Company's  quarterly  report on Form 10-Q for the quarter ended April
           30, 2001.*
     10.14 Employment Agreement effective July 19, 2001, between the Company and
           Mark Richards.*
     10.15 Employment Agreement effective September 1, 2001, between the Company
           and James Merideth-Webb.*
     10.16 Employment Agreement effective September 4, 2001, between the Company
           and Daniel W. Quall.*
     10.17 Consulting  Agreement  effective  as of January 1, 1997,  between the
           Company and Hugh T. Hornibrook.  Incorporated by reference to Exhibit
           10.33 to the SB-2.*
     10.18 Promissory  Note of  Brandon  M.  Dawson  dated  March 19,  1998,  as
           amended,  and related  Pledge  Agreement  between the Company and Mr.
           Dawson, dated May 1, 1998. Incorporated by reference to Exhibit 10.11
           to the 1999 Form 10-KSB.*
     10.19 Noncompetition  Agreement dated January 25, 1999,  between Sonus-USA,
           Inc.  and Gregory J.  Frazer.  Incorporated  by  reference to Exhibit
           10.15 to the 1999 Form 10-KSB.
     10.20 Amendment  Agreement  effective as of August 1, 1998,  by and between
           Sonus-USA,  Inc. and Gregory J. Frazer.  Incorporated by reference to
           Exhibit 10.16 to the 1999 Form 10-KSB.
     10.21 Promissory  Note of  Brandon  M.  Dawson  dated  December  19,  2000.
           Incorporated  by reference to Exhibit 10 to the  Company's  quarterly
           report on Form 10-Q for the quarter ended January 31, 2001.*
     10.22 Credit  and  Guaranty  Agreement  dated  as of May  31,  2001,  among
           Sonus-USA, Inc., as Borrower, the Company, as Guarantor, and GN Great
           Nordic A/S, as lender.**
     10.23 GN ReSound North America Sales Agreement dated May 31, 2001,  between
           GN  ReSound  North  America  Corporation  and  Sonus-USA,   Inc.  and
           Sonus-Canada Ltd. and, for certain limited purposes, the Company.**

                                       55
<PAGE>

     10.24 First Amendment dated as of November 19, 2001, to Credit and Guaranty
           Agreement  dated  as of May 31,  2001,  among  Sonus-USA,  Inc.,  the
           Company and GN Great Nordic A/S.**
     10.25 First  Amendment  dated as of November 19, 2001,  to GN ReSound North
           America Sales Agreement dated as of May 31, 2001,  between GN ReSound
           North America Corporation and Sonus-USA,  Inc., and Sonus-Canada Ltd.
           and, for certain limited purposes, the Company.**
     10.26 Consulting  Agreement dated August 2, 2001, between  Sonus-USA,  Inc.
           and Randall E. Drullinger.*
     21    The  Company's   subsidiaries  are  SONUS-USA,   Inc.,  a  Washington
           corporation,   Sonus-  Canada  Ltd.,  a  British  Columbia   (Canada)
           corporation,   Sonus-Texas,   Inc.,  an  Oregon  corporation,   Sonus
           Acquisition  Corp., an Oregon  corporation,  and Hear PO Corp., a New
           Mexico corporation.
     23.1  Consent of Ernst & Young LLP
     23.2  Consent of KPMG LLP.
     24    Power of attorney of certain officers and directors.

-----------
* Management contract or compensatory plan or arrangement.
** Portions  omitted  pursuant to a request for  confidential  treatment filed
      with the Securities and Exchange Commission.


                                       56
<PAGE>

<TABLE>
<CAPTION>

 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

Column a                                     Column B           Column C                Column D                  Column E
-----------------------------------------------------------------------------------------------------------------------------------
                                                               Additions               Deductions
                                                               ----------------------------------
                                                                                   Charged to
                                                               Charge to           Other
              Description                   Balance At         Costs and           Accounts     Deductions:       Balance At End
                                        Beginning of Period    Expenses            Describe     Describe (1)        of Period
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                <C>                              <C>                 <C>
Year ended July 31, 2001 Deducted from
  asset accounts:
   Allowance for doubtful accounts        $ 3,691,000        $  851,000              ---      $ (3,041,000)       $ 1,501,000
   Inventory reserve                              ---            78,000              ---               ---             78,000

Year ended July 31, 2000 Deducted from
  asset accounts:
   Allowance for doubtful accounts            907,000         2,691,000              ---            93,000          3,691,000

Year ended July 31, 1999 Deducted from
  asset accounts:
   Allowance for doubtful accounts            684,000           389,000              ---          (166,000)           907,000

---------------------

(1) Uncollectible accounts written off, net of recoveries.
</TABLE>


                                       57